A new report from the Congressional Research Service has confirmed what we complained about often last year—the Fed’s bailout programs were not stimulating the economy, but rather slowing down the recovery. The Fed’s low rates and multiple lending programs allowed banks access to virtually free money. The idea was that this would keep investors in the banks from freaking out like they did with Bear Stearns and Lehman, and that the banks could lend some of this free money into the economy to spur economic growth.
Instead banks have built high capital reserves and bought Treasuries to be safe but still make a 3-4% profit. So ironically, banks were borrowing from the government and then giving the money right back to the government at a higher rate than they borrowed in the first place. We ran a series of graphs back in October illustrating this.
Where do we go from here? We can’t change the past, but we can choose to place less trust in the Fed’s ability to manage prices and inflation going forward. We can address the problem of too-big-and-interconnected-to-fail in a substantive way unlike Dodd-Frank.