Oh, where to start here. Little hint: not where you think. I’m going to start with my disappointment in Jon Stewart. He is smarter than this analysis. Secondly, we can talk about the Bloomberg reporter who has been working this story. Either he or his editors know better that to report this story the way they have been.
The short version (according to these sources) is this: the government loaned the banks $17.7 billion virtually interest free which the banks invested with the government and made $13 billion on before paying back the loans. That sounds like a huge rip off of the government, which if it truly reflected what happened, would be a huge rip off. The truth is, of course, somewhat more complex.
And the story starts with bank math. Every bank has to balance the books, right? On one side is the money people put in the bank. On the other side is the money the bank loans out plus enough cash on hand to cover whatever people want to get out of their accounts. Bankers always want to have as much money as possible out on loans because that’s how they make money. Some days they have too much cash, some days too little. So what do they do? They make loans to each other overnight. Seriously, one day loans.
Banks (and a lot of other businesses) count on being able to get these kind of short term loans to operate from day to day. Most of the time there is no problem with this approach, but in 2007 and 2008, the situation had gotten to the point where “creditors lacked confidence” which is to say that nobody believed that anyone else was going to pay back their overnight loans. Keep in mind that Lehman Brothers, boring as hell Lehman Brothers, just disappeared one weekend. Poof! And all of its overnight loans with it.
So if nobody is willing to play the tune, how is the game of musical chairs going to continue? And how can we be sure there will be a chair for everyone when the music stops? That, my friends, is why we have a bank at the center of the game. A “central bank” called the Federal Reserve. And they did exactly what central banks do: they kept the music going and they made sure enough chairs (aka money) were available. They did this by making $17.7 trillion in overnight loans over a number of years. Is it unusual for one bank to be making all these loans? Yes. Is it unusual that this much money would be loaned and paid back? I doubt it.
Now, during this same period, the banks themselves were trying to figure out where to stash their cash. They did not trust each other, and they did not trust the average Joe looking for a home loan. They did trust the government, and the government needed them, or somebody, to lend it money to pay for the woefully inadequate stimulus plan about to go into effect. So the banks lent the money they had to the Department of the Treasury to fund the Federal Government.
Notice that they did not lend it to the Federal Reserve. Nor did they necessarily lend the money that they had borrowed from the Federal Reserve to the Department of the Treasury. They lent money to the Treasury at the same time that they were borrowing from the central bank. (Sort of like investing your retirement money in Visa stock while you use one of their credit cards to buy groceries until you get paid on Friday. Clear as mud, right?) But that’s the point, it’s not clear as mud so it’s not as simple as Jon Stewart wants to make it.
And he shouldn’t try to dumb down that argument because he misleads his audience and undercuts his credibility. The more salient point is that the banks failed to live up to the trust which had been placed in them. They did not trust each other, and we still do not trust them. They abandoned their role in service to the economic system in order to exploit that system and ultimately bring it to its knees.
Congress did not need to know more than it already knew about the $17.7 billion loaned through the Term Auction Facility to know that stricter regulation had to return to the financial sector. They failed the long term financial health of our country by not passing these regulations. It’s easy enough to point a finger at the semi-autonomous and largely silent Federal Reserve Bank, but one should be very suspicious of the hand that points.