Overnight, the US Federal Reserve released a slew of documents detailing the amazing level of support it gave the world economy, including banks, companies and central banks during the dark days of 2008 and 2009 as the globe hovered on the edge of collapse.

Amazing, valuable and it saved the world from collapse.

But don’t think the Fed wasn’t being altruistic in saving the world, it was cleaning up the whole mess it had presided over from 2001 to 2007 and exported to the world. The worst product ever made from a country that should have known better, but lost its way.

The Fed’s move was for America’s benefit, after all it was the US housing bubble and its financing via the alphabet soup of dodgy securities, such as CDOS, RMBS, CLOs, CDO squared, etc, that caused the problem. And that was caused by cheap money, lax regulation, greed and a host of other sins, from the most ordinary of Americans (liar loans) to the most sophisticated (Fed central bankers and other regulators)

Europe was a beneficiary too, especially London where many of the same financing practices were either refined (invented in some cases) and marketed to the greedy or the unwitting, especially among the innocents in German banking, Ireland, and some French banks.

And remember if the European banks had been forced to sell their dodgy US CDOs and all the other “assets”
at fire-sale prices, it would have been the American banks, investors and others who would have taken the full force of the huge losses and pressure.

Some would argue that seeing the Americans took us to the edge, the Fed had a duty to make sure the rest of us didn’t drop over, even if it meant saving the likes of Goldman Sachs, Citigroup, Bank of America, Morgan Stanley, Barclays and more (insurers, the ratings agencies, AIG, General Electric, General Motors’ finance arm, hedge funds and private equity companies, brokers, small banks, medium banks, accounts, greedy local and state governments) from failure, when many should have gone as punishment for the financial crimes they profited from, paying themselves huge bonuses into the bargain.

Of course, the banks and their soul mates in business, politics and the media don’t understand the damage that has been done, they are back in business, unrepentant and angry at the criticism. That is partly why the at-times crazed American Tea Party has emerged in the past 18 months. Many understand the damage that has been done and are angry.

But there were some that could not or would not be saved; Bear Stearns failed and was sold to JPMorgan, Lehman Brothers collapsed, and close to 350 banks, tiny, small, medium, large and super large (think Washington Mutual, the biggest failure of all at about $US170 billion) have so far collapsed, been sold off or closed. But not enough to send a lasting message to the survivors (although regulators have understood the lessons from their failures).

Bernie Madoff was discovered, a $US50 billion black hole that wasn’t found until too late. Bernie was symptomatic of what the Fed was saving elsewhere. All would have been called to account, as Bernie eventually was, if a big bank, say Goldman Sachs or Citi had failed.

“The Great Moderation” when the cost of credit was allowed to become an irrelevance, regulators in the US and Europe, smiled and waved through ever-increasing amounts of leverage and diminishing levels of capital, led in turn to the greatest bubble in history and all the lousy greed and profligacy that went with it. This was a creation of the Fed, the US government, other regulators in America and in Europe (but not Spain), especially in the UK, Germany and Ireland. When the music stopped and the brown stuff hit the fan and a few banks and financiers started going down, the Fed had to act.

Their creation became our crisis and the world’s, hence the unprecedented level of support from the US central bank.

And in countries such as Japan, Australia and New Zealand, the central banks had to join the rescue because the crisis threatened their financial systems and economies as the supply of US dollars dried up (the greenback is the lifeblood of international finance and trade).

So remember that inside Australia, the Reserve Bank struggled to keep our financial system and banks liquid and alive in the final quarter of 2008 with $45 billion of repurchases of residential mortgages, the provision of an extra $10 billion in cash to meet a silent run from nervous customers and provided a deposit system to allow worried banks to leave their money in the ‘safest’ bank of all, the central bank.

That was unprecedented, just as the actions of the Fed were astonishing and desperate. For all the talk of the US losing power, the disclosures underline the stark fact that only one central bank could have managed this, the Fed.

The Fed ran six programs to fund various parts of the system in the US and offshore. They are all detailed in this morning’s release from the central bank.

Companies from the mighty General Electric, to the broken Citigroup, the damaged Bank of America and a host of companies and banks small to giant (Barclays of the UK, big French and German banks), did deals with the Fed to get liquidity and keep themselves alive. All had played used The Great Moderation and its cheap credit binge to finance bigger and bigger holes into which they all fell when the game stopped.

The Fed’s primary dealer credit facility (PDCF) was one of the most important of the six areas of support. It’s detailed tells how the overnight money market in America was kept liquid and functioning by the Fed alone.

The PDCF was started in March 2008 to help support the system was Bear Stearns was imploding, freezing the overnight repurchase market, the main area of short-term funding in the US economy for banks.  This facility enabled dealers to access overnight funds from the Fed instead of the repo market.

The Fed’s disclosures show that Citigroup was the greatest cumulative user of this facility; its one-day demand peaked at $US18.625 billion November 26, 2008, just before the US Treasury stepped in and bailed it out.

(By way of comparison, just think of half a dozen banks in Ireland needing about $US200 billion a month in the past few months from the ECB and the central bank of Ireland to keep alive. Think of that and get an understanding of just of messed up Ireland is, and that was all their own work as well. And to clean up that mess, they have broken the country and forced it into administration).

Many of the Fed’s deals also linked into the US currency swaps with the Bank of England, the European Central Bank, the Bank of Canada, the RBA, the Bank of Japan and Sweden’s central bank to make sure a shortage of greenbacks didn’t collapse an unwitting company or bank in a far off economy and start a domino effect, not that one wasn’t starting as Ireland’s dodgy banks triggered a collapse in Europe.

And it simply amazing, more than 21,000 transactions that enabled US authorities to dole out $US3.3 trillion in aid to banks and companies struggling with a worst downturn since the Great Depression.

Four hundred and three separate swaps with a handful of the world’s most important central banks, including the Reserve Bank of Australia from late 2007 through to midway through this year. These swaps were designed to try and end the freeze on US dollars in Europe, Asia and other regions as the financial markets progressively froze over as the likes of Northern Rock, Bear Stearns and then Lehman Brothers failed.

It was all designed and made in America and exported to some of the greediest spots on earth, the City of London, the Dublin headquarters of of Ireland’s corrupted banks and dozing regulators, the balance sheets of the biggest ponzi scheme of all (no, not Bernie Madoff), but Iceland and its banks, to the German banks (remember that one of the biggest failures anywhere was HRE, Germany’s second biggest mortgage provider), and a host of smaller financial centres around the world, which were damaged in the aftershock (Dubai, Greece, etc).

So the Fed had to save the world, it exhausted itself in doing so, it exhausted America in doing so, but Americans do not understand that, especially the conservative sections of American business and politics. They won’t read the Fed’s releases overnight and say “never again” because of the damage we did to the world and ourselves.

They will frame their response along the lines of “never again” will we allow the Fed and government to spend so much bailing out foreign governments banks, etc, ignoring the fact that they (and especially the conservative, pro-business side of America) created the problem in the first place and then allowed it to flourish to their benefit.

In some respects the Tea Party movement in the US, with its anti-government support of banks, etc, will probably understand what the Fed did better than big business and the more mainstream areas of politics.

Many Americans still do not understand why the crisis happened and how it had to be cleaned up by the people who caused it.

Peter Fray

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