I am not one who says “I told you so” but I told you so. As is well known, I am no Fed apologist. Rather I have been hard on Bernanke – even calling him the second worse Fed chairman in modern times (the worse being William Miller). Bernanke is no William McChesney Martin, Paul Volcker or even Alan Greenspan – all of whom had some rocky times. Bernanke has been a handmaiden of both Bush and Obama. His Fed has been monetizing the national debt by purchasing treasurys directly from the Treasury rather than purchasing them from the private sector. I have said for years that this practice should be made illegal but thus far have not been able to get a single legislator to pay any attention to me. However, having taught at our universities for 40+ years, I am used to being ignored. Yet I have defended Bernanke for his purchases of asset backed securities – except those purchased from Fannie Mae and Freddie Mac or any other government entity. The reason is that the Fed steps in as a lender of last resort – one of its well defined functions. So when the Fed created special purpose facilities during the financial crisis to purchase asset backs, it was doing its duty as a lender of last resort. Without the Fed, the commercial paper market would have collapsed. Indeed, the Fed is singularly responsible for the economy not falling from recession to depression. Yet the Fed, paradoxically is also responsible for the economy not recovering and growing at such a slow pace. If the Fed did not step up and buy Treasurys, it would force fiscal responsibility upon our irresponsible elected officials in Washington. Those Fed haters have rallied against the Fed purchasing asset backed securities from the “fat cat” banks and businesses. However, as I have pointed out, the Fed is not subsidizing anyone. Its purchases are actually loans (repurchase agreements) and at maturity, the borrower buys back the assets at a positive interest rate. Moreover, the loans are overcollaterized in case the market moves downward so if the Fed has to sell the assets, it will not do so at a loss. Well the Wall Street Journal has published a piece stating that the US government is in the processes of selling the remaining assets acquired during the crisis. It seems that the government is going to make money and the main money losers are to no one’s surprise, Fannie Mae and Freddie Mac. However, the Fed has fully recouped its money from the banks and the Fed of New York has actually gained $5.2 billion in its loans to entities such as AIG. The Wall Street Journal says that when its all over, the total gain to the government is likely to exceed $10 billion. As I have pointed out before, it is ironic that the bulk of the criticism has centered on the Fed’s loans to the private sector and not the public sector. Excuse me, but that criticism is misdirected. The evidence clearly supports that by fulfilling its role as lender of last resort, the Fed knows what it is doing.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com