Daniel W. Drezner

Leave Ben Bernanke alone!!

When your agency is less popular than the federal institutions responsible for torture enhanced interrogation techniques, tax audits, and the requirement that you take your shoes off at the airport, you know you have a public image problem.  So I wonder if the following news will help or hurt the Fed:  The Federal Reserve has ...

No one likes the Fed

When your agency is less popular than the federal institutions responsible for torture enhanced interrogation techniques, tax audits, and the requirement that you take your shoes off at the airport, you know you have a public image problem. 

So I wonder if the following news will help or hurt the Fed: 

The Federal Reserve has made a $14bn profit on loan programmes that have provided hundreds of billions of dollars in liquidity to the financial system since the start of the crisis two years ago, according to Fed officials.

The internal estimate is based on the difference between the fees and interest on the lending facilities and the interest the Fed would have earned had it invested the funds in three-month Treasury bills.

The central bank earned about $19bn in income from charging interest and fees to financial institutions and investors that tapped the new facilities to obtain much-needed funds during the turmoil. The interest the Fed would have earned by investing the same amount in T-bills was an estimated $5bn, leaving a $14bn gain since August 2007….

The calculation by Fed staff, which has neither been audited, published or risk-adjusted, only deals with its liquidity facilities.

Those include discount window and Term Auction Facility loans to banks, currency swaps with other central banks, purchases of commercial paper and financing for investors in asset-backed securities.

If I’m reading this right, this assessment does not include the Troubled Assets Relief Program (TARP).  According to Daniel Gross, however, it seems like TARP will at least break even.   

The spreadsheets at financialstability.gov document the status of the 667 investments, worth $204.4 billion, made under the CPP. Morgan Stanley, which borrowed $10 billion in October 2008, paid back the cash in June and purchased the warrants for $950 million on Aug. 12, giving taxpayers a 12.7 percent return, according to SNL Financial. For the 22 companies that have bought back shares and warrants, the taxpayer received an annualized return of 17.5 percent—better than most hedge funds have done lately. (Another 15 have repaid part or all of the principal.) Since many of the largest financial institutions have left the program, the 37 “exits” represent 34 percent of the total cash initially disbursed. The bottom line: taxpayers have received $70.3 billion in principal, plus about $10 billion in dividends and warrant payments….

Investors have seen other returns. Since the Treasury Department in July converted the $25 billion CPP loan to Citi into common stock, at $3.25 a share, the U.S. taxpayer now holds 7.69 billion shares of the once mighty bank. As of Aug. 26, thanks to the rallying market, taxpayers were sitting on a $10.52 billion paper gain….

Given the results of the central-bank bailout thus far, Herb Allison, the former TIAA-CREF CEO who was tapped to run TARP, notes that “it’s quite possible we’ll have a positive return on the CPP program as a whole.”

Regardless, the CPP —combined with all the other stabilization efforts—has become less of a political and financial liability than it was last fall. In late August, the Office of Management and Budget said the lower-than-expected cost of bailing out the financial system—including the money paid back from the CPP—meant the 2009 fiscal deficit would be $1.58 trillion, $262 billion less than the prior estimate of $1.84 trillion. Lee Sachs, counselor to the Treasury secretary, invokes the MasterCard ad in weighing the true yield. “Dividends: 5 percent; equity warrants: 2 percent. Financial system not going into total abyss: priceless.”

In essence, the U.S. Federal Reserve has acted like the Mother of All Sovereign Wealth Funds for the past two years.  It placed a huge bet that most financial assets were being radically undervalued during the Great Panic last fall.  That bet appears to have paid off handsomely.  Oh, and the complete and utter collapse of the financial system was averted. 

Ben Bernanke has some significant political skills, and one would expect him to be able to put the best possible spin on this kind of news. 

Still, I wonder if it will do him any good.  When you have a 30% approval rating, it’s pretty easy for the other 70% to concoct stories that take good news and turn it into a narrative of evil. 

In this case, I can easily imagine Bernanke’s opponents combining this news with rumors about the Plunge Protection Team, nostalgia for the gold standard, a jeremiad by William Greider, and the belief that if the Fed made a profit that means it must have screwed the old, the poor and minorities out of their hard-earned money.  Mix together well, and I think you have a story that would make Fed-haters feel quite comfortable in their convictions.

Readers are encouraged to proffer their narrative for why Ben Bernanke is evil despite apparent policy successes in the comments.  The more outlandish, the better — I want to be ahead of Glenn Beck and Keith Olbermann on this one. 

 Twitter: @dandrezner

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