We've seen behind the curtain, as the Fed waved its magic liquidity wand over Wall Street. Now it's time to enlist this tool in the service of the people.
The Fed's invisible hand first really became visible with the bailout of AIG. House Speaker Nancy Pelosi said in June 2009:
"Many of us were, shall we say, if not surprised, taken aback when the Fed had $80 billion to invest -- to put into AIG just out of the blue. All of a sudden we wake up one morning and AIG has received $80 billion from the Fed. . . . So of course we're saying, Where's this money come from? "Oh, we have it. And not only that, we have more.'"
How much more -- $800 billion? $8 trillion?
The stage magician smiles coyly and rolls up his sleeves to show that there is nothing in them. "Try $12.3 trillion," he says.
That was the figure recently revealed for the Fed's "emergency lending programs" to bail out the banks.
"$12.3 trillion of our taxpayer money!" shout the bemused spectators as pigeons emerge from the showman's gloved hands. "We could have used that money to build roads and bridges, pay down the state's debts, keep homeowners in their homes!"
"Not exactly tax money," says the magician with his mysterious Mona Lisa smile. "When did you have $12.3 trillion in tax money sitting idle?"
Not only did he not use "tax money;" it seems he hardly used "money" at all. He just advanced numbers on a computer screen, amounting to credit against collateral, replacing the credit that would have been advanced by the money market before the Fatal Day the Money Market Died. According to CNNMoney -"
"[T]he Federal Reserve made $9 trillion in overnight loans to major banks and Wall Street firms during the Wall Street crisis . . . . All the loans were backed by collateral and all were paid back with a very low interest rate to the Fed -- an annual rate of between 0.5% to 3.5%. . . .
"In addition to the loan program for bond dealers, the data covered the Fed's purchases of more than $1 trillion in mortgages, and spending to back consumer and small business loans, as well as commercial paper used to keep large corporations running. . . .
"Most of the special programs set up by the Fed in response to the crisis of 2008 have since expired, although it still holds close to $2 trillion in assets it purchased during that time. The Fed said it did not lose money on any of the transactions that have been closed, and that it does not expect to lose money on the assets it still holds."
Or so it is reported in the media. . . .
The pigeons slip back up the sleeve from whence they came, a sleeve that was empty to start with.
The Central Bank as Lender of Last Resort
Where did the Fed get this remarkable power? Central banks are "lenders of last resort," which means they are authorized to advance as much credit as the system requires. It's all keystrokes on a computer, and the supply of this credit is limitless. According to Wikipedia: