The $80 billion gift by taxpayers to banks.

I tried to estimate the total amount of taxpayers’ money effectively given to private banks during the crisis here a month ago. That estimate was way out. Apologies.

The best excuse I can offer is that I DID SPEND a fair amount of time trying to unearth figures for the total amount loaned by the Fed to private banks and what rate of interest was charged. Plus of course the Fed itself (and other central banks) have done everything they can to prevaricate, obfuscate and generally hide the truth about the size of the bailout. However, I’ve now stumbled across what looks like a better set of figures.

The figure often given for the total amount loaned by the Fed is something in the rough order of $15trillion, but that is very misleading because it seems to involve a lot of double counting.

To judge by an article by Mick West entitled “Debunked: The Fed "gave away" $16 Trillion….”, it looks like the total amount ever loaned at one one time was around ONE trillion. As to the PERIOD for which the loan lasted, obviously the amount loaned varied from month to month. But to judge from the chart in West’s article (see below) we’re talking about a loan averaging about $600bn, and lasting from around April 2008 to October 2009 (18 months).

As to the rate of interest, certainly SOME OF the loans were at a zero rate, but West seems to suggest the average rate was around 0.75%, and that’s certainly not the sort of rate that Walter Bagehot had in mind when he said that the central bank should lend at “penalty” rates to private banks in trouble.

As to what a realistic penalty rate is, that’s impossible to say with any accuracy, but Warren Buffet loaned a few billion to Goldman Sachs at the height of the crisis at 10%, so let’s take that as being a realistic penalty rate.

That means (continuing the back of the envelope calculation) that private banks obtained Fed money (i.e. taxpayer money) at 9.25% less than they should have. So I’m claiming the total effective gift by taxpayers to private banks was:

9.25% x $600bn x 1.5years = $83bn

It might seem that $83bn is not taxpayers’ money in that the money was produced from thin air by the Fed, not taken out of taxpayers’ pockets. However, money created by the state is effectively “the peoples’ money”: that is, the recession could perfectly well have been dealt with by using that “thin air” money in a variety of other ways, e.g. to boost public spending or cut taxes. Thus the $83bn is in effect taxpayers’ money.

But there is no reason for taxpayers to simply grin and bear it: that is, private banks could perfectly well be made to pay that money back. But that’s unlikely to happen: after all, banks make large contributions to politicians election campaigns precisely so as to ensure that banks continue to receive large dollops of taxpayers’ money.

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P.S. (3rd June 2006).  The opening sentences of this General Audit Office work confirm West's "$1trillion peak" estimate. On the other hand Elizabeth Warren (one of the few intelligent and honest people on Capitol Hill) talks about a $13trillion loan. My guess is she has fallen for the common "double counting" error that plagues this issue. She also confirms the above "negligible rate of interest" point.