Did the Fed Really Lend $16 Trillion to Foreign Banks?

Steven Horwitz

There's been some chatter on the right about the release on Friday of the GAO preliminary report on the audit of the Fed.  The one thing that seems to be getting some attention is what appears to be $16 trillion in loans to foreign banks.  You can only imagine how that will play out on the anti-Fed, nativist right.

Unfortunately, for the purveyors of this story, they didn't read the fine print very well.  The GAO calculated that number by the raw addition of loans, not taking into account whether they were cases of renewing a loan for an additional time period.  The same loan renewed over multiple periods is counted as a loan of the principal x the number of times renewed.  So some of that $16t reflects the same loan being renewed multiple times.  As the GAO report states (p. 130), my emphasis:

"Table 8 aggregates total dollar transaction amounts by adding the total dollar amount of all loans but does not adjust these amounts to reflect differences across programs in the term over which loans were outstanding. For example, an overnight PDCF loan of $10 billion that was renewed daily at the same level for 30 business days would result in an aggregate amount borrowed of $300 billion although the institution, in effect, borrowed only $10 billion over 30 days. In contrast, a TAF loan of $10 billion extended over a 1-month period would appear as $10 billion. As a result, the total transaction amounts shown in table 8 for PDCF are not directly comparable to the total transaction amounts shown for TAF and other programs that made loans for periods longer than overnight."

No doubt there are lots of problems with what the Fed was doing here, but calling this "$16 trillion of loans," complete with the fact that it's more than the US GDP, is unnecessary hype as well as highly misleading.  Once again, critics of the Fed do their cause no favors when they are sloppy.  Let's find out what's in that report and use it fairly and accurately.  We don't need to exaggerate things:   what the Fed's been up to is bad enough.  Exaggerating only hurts our credibility.

Comments

[Allan Walstad]

Does "anti-Fed" go with "nativist" somehow?

[Steve Horwitz]

Not a priori, but as an empirical fact with some regularity.

[Nikolaj]

Allan, Steve is talking here about that evil nativist, bigot and anti-Semite Ron Paul and his army of awful unsophisticated and unrespectable "end the Fed" gold-bugs.

[Steve Horwitz]

Uh no, you nasty piece of work, I was not. I hadn't even thought about Ron Paul AT ALL in writing that. I was just making the abstract observation that there ARE people on the right who are both anti-Fed and nativist, and this would drive them nuts.

Plus, I would never describe RP as "nativist." I think he's wrong in objecting to the attempts at free trade of the last few decades, but I have no doubt that he is committed to free trade. I just disagree with his judgment about the net effect of those treaties.

So stop assuming you know what I think and crawl back into your cave. If you can't participate here without insulting your hosts, you will find yourself in the ranks of the "illustrious."

[Allan Walstad]

Ok Steve, thanks.

[Jerry O'Driscoll]

Good post and a cautionary tale. The internet is filled with pseudo facts. Otherwise intelligent people forward material without fact checking it.

The Fed did enough lending to foreign banks to raise legitimate questions. And they are still doing it indirectly, every week, with currency swaps with foreign central banks.

[Jule Herbert]

Seems like whoever thought to provide the footnote to "Table 8" should have had the sense to recast it or remove it from the report. These are accountants?

[Jimmy]

Good piece, Steve Horwitz

and to Nikolaj:

Steve is talking here about that evil nativist, bigot and anti-Semite Ron Paul
...
What an idiotic thing to say. Let us merely quote Moshe Feiglin, Israeli libertarian:

"It amuses me to no end that all the most Zionist voices in Israel call for an end to American aid to Israel. As best I can figure, it is only the LESS Zionist voices that advocate for aid. I am not so cynical as to say that the people advocating for American aid to Israel are actually conspiring to harm Israel in a subtle way, but I do believe they are ignorant, and that the more Zionist people are simply wiser and more learned about what will truly benefit Israel. Ron Paul has some splendidly pro-Israel remarks in his interview with Mike Church, and I wish more Zionists would listen to Ron Paul."P

You are also free to find out that Ron Paul, when Israel attacked Iraq's Osiris reactor in the 80s, DEFENDED their right to action, even as the whole world, including the Reagan Administration, condemned them. http://www.youtube.com/watch?v=xv9bQFanXj8

Now that you know your comment is asinine, maybe you won't say that anymore. Think before talking.

[Nikolaj]

Jimmy, I was sarcastic. Of course that I don't think that Ron Paul is a nativist or anti-Semite. I was just ironically parroting what many "respectable" libertarians were repeating time and again (see for example what some people at Reason magazine and Cato were writing about the so called newsletter controversy).

Steve,
"I was just making the abstract observation that there ARE people on the right who are both anti-Fed and nativist, and this would drive them nuts."

Not quite. You said as a clarification;"not apriori but as an empirical fact with some regularity." I am not familiar with any nativist group which is strongly anti-Fed. Any names? Organization? If you did not mean Ron Paul, you must have had someone else in mind, since you described them as an "empirical fact with some regularity". Now, they disappear in the abstract "some people, some right-wingers". Who they are? I have seen your earlier talk in which you described the fact that the Aldrich bill was written at Jekyll Island as a "nutjob, conspiracy theory of the Fed" connected to the anti-Semitic paranoia; incidentally, the view held by Murray Rothbard, Ron Paul and pretty much all the "Alabama Austrians". Moreover, you can find the same book called "The Creature from Jekyll Island" you described as paranoid on the Ron Paul's website Campaign for Liberty as a mandatory reading about the Fed! That was the reason why I believed that the "nativist" nutjobs you were referring to in this post were actually the same Jekyll Island conspiracy nutjobs from your talk.

[McKinney]

I wouldn't be surprised if the Fed bails out the Big EZ buy purchasing massive amounts of bonds.

[McKinney]

Some writers still promote the idea that the Fed followed the price of gold in the 80's and 90's:

"But after the spring of 1982, there all of a sudden arose a close sequential relationship between a declining price of gold and Fed easing, and a rising price of gold and Fed tightening. It’s probably the single greatest secret in the history of modern monetary policy. After mid-1982, it looks like the Fed followed a gold price rule for quite a while."

http://blogs.forbes.com/briandomitrovic/

[Edgardo]

Steve, you start your post saying that GAO released its preliminary report last Friday --that is, on August 31, 2012. The report, however, is dated July 2011. Please confirm whether there is a new preliminary report in addition to the one issued on July 2011. I have not been able to find any new report.

[Vikingvista]

Reminds me of those who reflexively speak of the notional value of credit default swaps as though it represents credit expansion or the amount of liability risk.

[Mario Rizzo]

"Alabama Austrians"

[Account Deleted]

It is good to note that rollovers do not add to total outstandings for the nativists and others too.

I, for one, would object to the Fed debasing the currency -- that I am forced to use by my government for transactions over which it has the power to compel me or harassed into using by abusive reporting requirements (FATCA comes to mind) among other things -- in order to provide below market or risk-maladjusted loans to folks in other countries, other states of the union or down any street including my own. Also, I would object to its purchases of United States Treasury debt at a discount to market in order to enable the spendthrift United States Government to make horrendous use of the proceeds of such debt and to its efforts with ZIRP to force me and others to chase yield with riskier investments and asset purchases. The Fed has been intervening in far too many markets for far too long without sufficient scrutiny.

To link complaints -- about the Fed's secret wielding of such significant power while it helps (abets) entities of all sorts of stripes to conceal their failures and poor financial conditions -- with the "nativist right" strikes me as ad hominem of sorts.

[Ram]

Robert-Thanks for your comments. I guess we just have to agree to drsagiee on some points. My experience is that the private sector will take risks and should take risks. Sometimes those risks explode, sometimes systemically. It is hard to make accurate predictions, especially about the future.Yet with global capital gluts, there will be pressure of higher returns. Side note on AIG: The buyers of bond insurance knew it was privately insured, and not backed up by the federal government. They still took risky (in hindsight only perhaps) positions in bonds. A house of cards was built on private insurance. The problem is not the job losses in the financial sector, but the spreading calamity and economic collapse.Anyway, I think we agree on the general direction of MM!

[Lidyane]

It's imperative that more peolpe make this exact point.

[Kaadhu]

JP, Yes, I believe that innttvertionises should support fixed exchange rate regimes if they want support for their interventionist policies.You mention Obama, but I do not think that is the best example. After all the Bush administration was also extremely interventionist even prior to the the crisis. The best example in my view is the drive toward political integration in Europe on the back the euro crisis. There is no doubt that eurocrats actively is using the euro crisis as an excuse for more regulation and political centralization.