It’s a little weird that reporters are hesitant to clearly spell out what happened. Basically the Fed printed a huge amount of money. Some of that money they used to do what TARP was originally supposed to do, buy up Big Shitpile at inflated prices. Some of that money they lent to banks at basically 0 interest. Of course there were plenty of other things they could have done with 2 trillion bucks, if preserving the executive compensation at megabanks wasn’t thought to be crucial for the survival of the economy. They could have dropped it from helicopters. They could have paid off mortgages directly. They could have given it to state governments. They could have bought me a SUPERTRAIN. But, no, they decided that propping up an obviously failed system of financial intermediaries was the important thing, so that’s what they did.
But there are two points worth highlighting.
First, this money came with no strings attached, unlike any other federal contract. If we gave someone $5 billion to build bridges, there are all sorts of specs and regulations that have to be met (unless you’re a Too Big Too Fail Contractor like Halliburton). Hell, the regulations for a dinky little NIH grant are pretty complex. And nobody dies if an NIH grant falls down. Yet, TARP recipients got this money with virtually no guidelines. Everyone was told this would allow banks to start lending again, although it was obvious they weren’t going to do that, unless ordered to do so.
Which brings us to the second point: this is an inflationary scheme designed to save the banks. Suppose I’m a bank with a $10 billion hole in my balance sheet. I go to the Fed and get $10 billion dollars. What’s the surest way to turn that $10 billion into rock solid assets? Buy T-bills–that is, loan it right back. After a year, the Mad Biologist’s bank not only replaced a $10 billion dollar hole with cash, but we made around $300 million on the interest.
Now, this doesn’t really increase the deficit. After all, we ‘paid back the money.’ However, what this does is increase the money supply. We’ve just created $10.3 billion out of thin air. That’s not necessarily a bad thing, if we were to point that money towards something truly useful (SUPERTRAINS! I CAN HAZ MOAR GENOMZ?). We could have said that employees won’t have to pay payroll taxes for the next three years, and printed more money to cover the shortfall, for instance. But we didn’t. Instead, we decreased the value of everyone’s savings and wages. To help the FIRE sector. The idiots who got us into this mess in the first place.
So, I guess INIIBDOI (It’s Not Inflationary If Banks Do It).