For a few months, parts of this story have been surfacing. Between August, 2007 and
April 2010, the Fed has loaned 190 banks $7.7 trillion. The banks used the money to buy smaller banks, and they made a profit of $13 trillion.
In addition, the Fed provided more than $5 trillion more in guarantees for the banks. That comes to $13 trillion.
Some, using GAO figures, think the total is closer to $16.
These loans and guarantees were essentially "secret," and in the last analysis, they were made at the expense of the US tax payer.
What does all this mean.
For one thing, it means that the financial system was is far worse shape that most of us imagined. It is still badly bruised, and the banks are sitting on money, refusing to write down lossses, and refusinmg to make loans to small businesses.
Secondly, the depth of the financial crisis also tells us that the weakness of the economy is far greater than was first imagined.
This bears on the whole debate about what Obama did with the economy or what could be expected of president.
With the banking system in such bad shape, it is no wonder we did not wind up in a recession. The Obama stimulus prevented that.
The real size of the bank bail-out indicates how deep the hole in the economy really is.
It is just plain dishonest for people like Willard Mitt Romney to deny Obama accomplished anything and suggest he made things worse.
The weakness of the economy is so gret that we shjould be considering whether it compares to that of Japan in that nation's lost decade. It just might be that Obama is right to avoid talking about general stimulus. With 30% idyle plant capacity, general stimulus might be pointless. The president is right to stick to specific stimulus proposals that will produce jobs, especially those targetted to small business. This is to say that Barack Obama, the pragmatic moderate, has been following the correct coursse all along.
We cannot expect any honesty from most Republicans, but we should be doing several things:
1) Review once more how the nation got into this mess. We have deep problems that will take years to fix.
2) Republicans have reverted to archaic theories developed by Ludwig von Mise and
Frederick Hayek. Their notions are based mostly on political philosophy, and theorizing--not empirial evidence. They thought there should never be bail-outs, but they did not see how interconnected the banks would be. They also opposed spending to stimulate the economy or economic regulations. We need to figure out whether pursuing these policies will push the economy over the cliff.
3) Only one Republican, John Huntsman, offers some proposals that would fend off another financial system collapse. The others, with their no-regulation posture, guarantee a worse crash down the road. Huntsman wants to break up the banks that are too big to fail. He also wants to tax exotic financial transactions. We could improved a bit on this by raising the tax rate as the risk increases.
The money raised through the tax would be used to stimulatge manufacturing.
It is the only promising Republican idea out there and is similar to views offered by Paul Krugman and others.
For the good of the country, we progressives should be discussing this and asking the other Republicans what is wrong with it.