According to information received by virtue of a Freedom of Information lawsuit won by Bloomberg News, some of the biggest banks in the United States netted 13 billion in profits from secret Federal Reserve Bank loans in 2008.
Under the guise of saving the financial system, the Fed committed 7.7 trillion (that’s right – trillion) in funds through March of 2009. The funds were provided to banks at very low interest rates and the banks made loans at higher rates to customers resulting in the huge profits for the banks. In essence, these transactions amounted to a cash transfer from US citizens to bankers’ pockets. These same bankers had already bilked taxpayers for trillions in the lead-up to the collapse of 2008. This injection added insult to injury.
One prominent banker, John Allison, former CEO at BB&T, appeared last night on the Fox Business show Freedom Watch. Allison argued that the worst aspect of this scenario is that the Fed bailouts allowed a broken system to continue and to grow even further. The bailouts saved unhealthy banks at the expense of other solvent banks. Too big to fail banks are now even bigger by virtue of this Fed injection. Taxpayers are still at considerable risk.
Presidential Candidate Ron Paul has been a long-time advocate for dissolving the Federal Reserve System precisely because of shenanigans like this. Paul believes capitalism is a system that allows for creative destruction when too much risk creates bad business outcomes, Failure is a necessary result from mal-investment and bad business practices. Unfortunately, in the United States today, as in this latest Fed fiasco, we socialize risk and capitalize profits – mostly for bankers and others at the top of the economic food chain.
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Kevin Kervick is the author of Discovering Possibility: A Common Sense Conservative Manifesto (For Classical Liberals Too).
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