Did the Fed Bank Bailout Work After All?

NEW YORK (TheStreet) -- The Federal Reserve's move to prop up the banking system amid the rubble of the Great Recession caught flak from a wide variety of critics, including the media, politicians, economists and even Main Street Americans.

A big complaint: "Why should we bail out the bankers whose policy decisions paved the way for the economic collapse in the first place?"

Yes, banks did make high-risk investment decisions, particularly in the fragile derivatives market and by issuing "no doc" home loans to borrowers who couldn't pay the money back.

No matter to the Federal Reserve, who under the direction of former chief Ben Bernanke decided job one was to provide big banks with short-term loans.

And despite the criticism, guess what? The strategy worked -- or so says a study from Washington University in St. Louis.

Jennifer Dlugosz, a finance professor at Washington University in St. Louis' Olin Business School, along with Allen Berger of the University of South Carolina; Lamont Black of DePaul University; and Christina Bouwman of Case Western Reserve University, studied two key areas linked to the Fed's post-recession bank bailout policy and found they actually led to "increased lending to firms and households."

The study found that, again and again, banks turned to crisis systems set up by the Fed known as the "discount window" and Term Auction Facility, and, instead of sitting on cash, enabled banks to use that cash to hike lending to individuals and businesses and save the economy from further damage.

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