Summing Up the Total So Far

So pretty much everyone is aware of the $700 billion “bank bailout” and the pending “auto bailout,” but what most people don’t realize, is that these are only a fraction of the total government expenditures and guarantees that have gone on so far over the past year. Government agencies and the Federal Reserve, which get less media attention and have no legislative hurtles have gone about instituting many other programs on their own.

So I was reading a WSJ article this week that has outlined that the Federal Reserve’s balance sheet has exploded in recent months, ballooning from about $800 billion to about $2.2 trillion since September. For the most part, the Fed has essentially printed $1.4 trillion dollars to purchase or borrow other assets. If this is kept in the system for too long once a recovery begins, we will be seeing inflation like we haven’t seen for years. The Fed says that it will tighten its policy when needed, but given their recent track record, I wouldn’t put much faith in that. And the market seems to agree with me as gold has been inching up recently.

But this whole thing got me thinking and I went about grabbing other info I have accumulated recently and came up with a list of all the various programs created over the past year. I’m probably missing a few small ones, but here is what I came up with.

(If amount allocated is yet to be used in it's entirety, the amount used thus far is in italics.)

Federal Reserve - $4.75 Trillion

Commercial Paper Funding Facility - $1.8 trillion ($312 billion)
Buys short term notes from private firms

Term Action Facility - $900 Billion ($415 billion)
Auctions off loans to banks

Term Securities Lending Facility - $250 billion ($190 billion)
Allows financial firms to borrow treasury bonds in exchange for low quality debt

Money market Investor Funding Facility - $540 billion ($0)
Buys assets from financial companies that support money market funds

Credit Extension to AIG - $123 billion ($87 billion)

Citigroup Bailout - $291 Billion
Guarantee of toxic assets

Discount Window - $92 billion
Banks directly borrowing cash from the Fed

Discount Window II - $50 billion
Extends direct bank lending function to securities firms

Commercial Paper Program II - $62 billion
Loans money to banks to buy commercial paper from mutual funds

Bear Stearns Bailout - $29 billion ($27 billion)
Guaranteed assets in brokered JP Morgan buyout

Overnight Bank Loans - $10 billion

Other Assets - $606 billion
Includes treasury bonds purchased with printed cash in order to help finance the government

FDIC - $1.55 Trillion

Temporary Liquidity Guarantee Program, Secured Debt Guarantee Program, Transaction Account Guarantee Program, increase of deposit insurance limit and other interbank lending guarantees - $1.4 Trillion
Various insurance programs backing debt between different parties

GE Capital Bailout - $139 billion
Debt Guarantee to General Electric's lending arm

Citigroup Bailout - $10 billion
Guarantees Citi’s toxic assets

Treasury Department - $947 Billion

Troubled Asset Relief Program - $700 Billion ($336 billion)
Originally for purchasing distressed assess; now for buying equity positions in companies

Stimulus Package - $168 billion
“Rebate Checks” of earlier this year as well as some other minor tax credits

Bank Tax Credits - $29 billion
To compensate for the government wiping out Fannie and Freddie securities held by banks

Treasury Exchange Stabilization Fund - $50 billion
Designed to manipulate currency markets - now used to insure money market funds

Federal Housing Administration- $300 Billion

Loan guarantees for refinanced mortgages for struggling and delinquent home owners

Nationalization of Freddie Mac and Fannie Mae - $5.2 Trillion

Capital Injection - $200 billion ($25 billion)
Government buys preferred shares and opens up line of credit

Mortgage Debt Guarantee - $5 Trillion
Government acquires the guarantee on all mortgage securities sold by the two GSE’s

Total Earmarked: $12.45 Trillion - Used So Far: $8.74 Trillion
Spent: $4.09 trillion
Loans: $1.49 trillion
Guarantees: $6.78 trillion

Likely to be passes soon:
Auto Bailout: $75 to $125 billion
Stimulus Package: $500 to $850 billion

(Sources: FDIC, US Treasury, FHA, Federal Reserve, Washington Post)

Keep in mind too that these are only the new or expanded programs. This list does not include preexisting “normal” expenditures like increased unemployment compensation or the FDIC deposit insurance. Even without these, the totals are mind boggling. With the likely auto bailout and upcoming stimulus package, various government bodies will have spent, loaned out or insured somewhere around $13 trillion in less than a year! To put this into perspective, the entire output of the US economy in a year is about $14.4 trillion. The amount of $13 trillion is larger than the annual economic output of China, India, Brazil and Indonesia combined, the four largest countries not including the US, which include over 2.9 billion people. This amounts to about 30 percent of all financial wealth of all US households combined. Or it translates into about $43,000 per US resident or about $108,000 per household! So this is your piece of the pie so far.

Now all of this isn’t spent money. The majority is either loans or insurance, so all the money will not be lost. Likely, most of the loans will be paid back and not all the insured assets will go bad (though a lot of them will). Furthermore, much of the spent money went to buying assets that will likely have at least some value to sell back later on.

I guess my point however is to show exactly how large and unprecedented this is, and that is goes far beyond the “bail out” bills. At the macro level, the government has essentially taken control over the entire financial system. In broad areas, capital is no longer largely allocated to areas that investors believe are most profitable and therefore most productive, but rather to what areas government has deemed it to go to. And much of this has been done by agencies and the Fed using extremely loose legal interpretations of their powers. The amount of raw power and authority the Fed, FDIC, and Treasury have been allowed to wield without Congressional approval is unbelievable. Distortions are done directly by the partial nationalization of the financial industry (soon to be done with the auto as well), or it’s done by placing guarantees on various assets, incentivizing more capital to flow into these over other alternatives that government bureaucrats deem less worthy. Event the stock market of recent months reacts little to earnings reports and instead has violent swings based one expectations of various government actions.

We are now in a political economy. The gigantic “stimulus package” soon to be passed is going to be the largest pork barrel project in history as every mayor, governor, and special interest down to a city councilman’s cousin who owns a paving company is lining up to the trough for a piece of the handout. This is the closest thing to a command and control economy that this country has faced since WWII. And all this done under the watch of a President whose critics have attacked him for being a “free market ideologue.” If this is what a champion of free market capitalism brings us, I don’t even want to know what the next administration and Congress is going to do. Maybe buying gold is looking good right now.

-EJB

More on the Fed and the Housing Bubble

I ran into this article today. It's a bit more technical then what I've previously linked to in the past, but if your willing to read through it, its worth it. I had previously posted about how loose monetary policy had been a large contributor to our housing mess. This argues along the same notion. From the article, here are a couple of relevant charts.

Fed Funds Rate














Growth of Subprime Loans















Notice the correlation with subprime growing starting in 2001 and accelerating through 2005, the periods when the Fed held very low interest rates stoking a bubble in housing investment. Whats just as important is realizing that this mess want just subprime, but an explosion of housing lending in general, which is discussed more in t e article. The growth began to slow as the Fed raised rates and then started to fall as the housing bubble popped.

-EJB

The Federal Reserve's Role in the Housing Crisis

As is usually the case in discussing economic policy, public debate rarely focuses around facts or theory and usually devolves into overly simplistic notions based in jealousy and frustration. The current housing crisis is no different. Both major presidential candidates, in an attempt to appeal to populous sentiment have chalked up our entire problem to be nothing more then the "greed" of Wall Street and therefore come to the conclusion that the "free market failed." The remedy is then by default more "regulation" which is never defined or explained by those advocating for it.

The reality is that there were a number of factors that have contributed to the housing bubble, the mortgage market collapse and the associated economic downturn. I therefore plan on starting a series of posts that will try to address some of these issues. This first one looks at the role the Federal Reserve had in creating, or at least contributing to, the housing bubble's rise and eventual popping. I bring your attention to the chart below:

The blue line is the ratio of the average price of a home based on an index to total GDP. It was scaled so that 1992 =1. The green line is the Federal Funds rate, the interest rate that the Federal Reserve manipulates when it is reported that interest rates have been "cut" or "raised." This is the rate at which banks lend to each other. The red line is a weighted average of mortgage interest rates.

Normally, house prices only grow as fast on average as GDP does, which correlates with the average incomes of buyers. This makes sense; as incomes rise, there is more demand for housing, and prices rise.

However, you can see how this proportional relationship of the two in the 1990's, shown by a relatively level line, began to change around midway through 2000. This is by no coincidence around the same time that the Fed cut the Fed Funds rate to a very low rate and kept it there for a very long time, particularly relative to the previous recession in 1991-1992. This had the effect of lowering mortgage rates to historically very low levels as seen in the red line. Around 2000, when mortgage rates started falling, home prices started rising as the cost of a mortgage payments went down and therefore the quantity of housing demanded went up. Likewise, the bubble was "popped" around 2006, right when the FED had now raised its rates and mortgage rates started to rise.

Essentially, it was not the "free market" or "greed" that caused this bubble, or at least not in of itself. The Fed, a non-free market institution had a very important role in creating or at least exacerbating the bubble and therefore ultimately our housing and economic woes. This chart (current through June) shows that in order to come back into equilibrium, prices have to fall a good amount further.

For a more detailed explanation, one good example can be read here.


-EJB


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Well, I must confess that, originally, I was one of those calling for the end of the "free market." My belief was that investor greed and market inefficiencies were entirely to blame for the collapse. Clearly, as you have eloquently stated, they were not. You even have a chart which lends itself nicely to your point...and I cannot argue against a chart. Believe me, I have tried...typically the argument ends with me yelling at it and the chart just sitting there...mocking me in its silence.

However, a few quick points. The chart and the statistics that it represents could never be understood by a vast majority of voters. If Obama or McCain were to drag an easel onto the stage and unveil this chart, I can guarantee that their poll numbers would drop.

I also think it would be a mistake to condemn the government entirely. The State's goals were amicable. I think we can all agree that increasing the amount of homeownership, especially among lower income families is a good thing. However, clearly the Fed messed up in choosing what means to follow in order to reach that end.

Furthermore, it would be misguided to ignore the important part that greed did play in the crisis - and I do not mean to suggest that EJ ignores this factor, he simply hasn't gotten to that part of his analysis yet. But to preempt him a little, at the height of the sub-prime mortgage crisis, there was absolutely no way that investors could claim that they did not see a crisis on the horizon. Everyone, including the CEO and CFO of Fannie Mae, recognized that the securitizing of these high-risk loans, coupled with the creation of negative externalities on the part of such organizations as Fannie, was a recipe for future disaster.

The candidates would do well to elaborate on their definition of "regulation," because, clearly, regulation is not the antidote. The important distinction between "oversight" and "regulation" is getting lost in the fracas. Congress, the SEC and the Treasury did not fail in its ability to "regulate" but actually failed to adequately oversee the market. Increasing the SEC's ability to oversee trading of this kind would be a perfectly reasonable response to the crisis...but it would not involve strengthening mandatory disclosure provisions or any other sort of harsh government regulation.


~JSK

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I agree with you that this is too complex for candidates to bring up, but more analysis could be done, or in particular why isn't the media in its endless opinion shows talking about this kind of stuff? I know I for one had a special place in my heart for those charts Ross Perrot used to always bring up to the stage with him. :)

One thing with the Fed and affordable housing though - there were and still are many government polices that were created to increase home ownership and your right that I will get to those in the future, but the Fed had little to do with that by design. The Fed kept rates so low not to increase home ownership, but because they were worried about deflation at the time and wanted to aggressively inflate the money supply. They overdid it though. And it isn't necessarily Greenspan's fault either, but is is because the Fed suffers from the shortcomings of any central economic planning attempt that has been tried. Mainly, it is impossible for anyone to have enough accurate information at their disposal to be able to manage or manipulate an extrmely complex organism as a national economy correctly. There are always unintended consequences of intervention.

-EJB