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Wednesday, December 7, 2011

Federal Reserve’s Emergency Lending Activities

The Federal Reserve issued a letter yesterday to address criticisms issued by a number of news sources regarding its emergency lending activities during the financial crisis. The articles accused the Federal Reserve of “secret lending that was not disclosed to Congress or the public.” Chairman Bernanke’s letter highlights a few points in response to these statements.

Many of the articles made claims of “secret” loans made. “No lending program was ever kept secret from Congress or the public. All of the programs were publicly announced when they were initiated.” Moreover, information regarding the scope of the lending was provided to the public weekly via the Federal Reserve’s balance sheet as well as detailed monthly reports to congress.

The Federal Reserve did not release the names of counterparties and borrowers immediately because it would have undermined the effectiveness of the emergency lending. Announcing the names of specific banks requiring loans would lead to a run on those specific banks, necessitating more lending. The Federal Reserve did inform Congress of the volume of borrowing by large banks despite these restrictions. The monthly reports detailed the average borrowing during the month in aggregate for the five largest discount window borrowers, the next five, and the rest.

Almost all of the emergency loans made have already been repaid or are on track to be fully repaid. In fact, these loans generated considerable income for taxpayers. The Federal Reserve reports that, “the emergency lending programs have generated an estimated $20 billion in interest income for the Treasury. Moreover, in 2009 and 2010, the Federal Reserve returned to the taxpayers over $125 billion in excess earnings on its operations, including emergency lending.”

See Bernanke’s full letter here.

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