The Price of Confidence


During the height of the credit crisis of 2008-9, the Federal Reserve and Treasury launched so many different lending programs and bailout facilities that it was hard to keep track of them all.

Each program or facility used a distinct acronym to represent its particular portion of Bernanke’s Bailout Buffet. Thus, for example, the Commercial Paper Funding Facility became simply the “CPFF.” But the Fed also served up bailout facilities known as the TARP, TOP, TAF, TSLF, TALF, PDCF, AMBSPP, etc.

At the end of the day, this “alphabet soup” of lending programs contained distinctions without a difference. On the receiving side of every acronym you would find a Wall Street banker with a hat in his hand. For ease of accounting, the Fed could have simply merged all the programs together into one giant WSBBF (Wall Street Banker Bailout Facility). But politics prevented that option.

So instead, the Fed created lots of different programs and facilities with essentially identical mandates. And if you’re curious about the volume of lending they conducted, or about any other component of the Fed’s balance sheet, you can find the information right here…or at least most of the information.

A friend of The Daily Reckoning recently discovered a curious error on the Federal Reserve’s own Web site. By way of background, our anonymous source is neither a professional economist nor a professional investor. In fact, he’s not even an amateur economist or investor. He’s just a guy with an eye for detail.

One month ago, our source noticed an apparent error on the website of the Cleveland Fed. Specifically, he observed that the “Detailed View” of the Fed’s balance sheet did not match the “Summary View.”

So he emailed a responsible party at the Fed to gain clarification and/or elucidation. The email stream proceeded as follows [the names have been removed to protect both the innocent and the guilty]:

Dear “Fed Employee,”

I hope you can spare a moment to answer a question. As you probably know, this web page has gotten quite a bit of attention:

But it seems to me that the Summary View and the Details View don’t match up. Specifically, I think the Details View omits Long Term Treasury Purchases. Once those are added in, the Details View exactly matches the Summary View.

Am I right? And if so, is the discrepancy inadvertent, or is there a reason for it?

Just trying to understand the context of the recently-announced QE2! Thanks in advance for any light you can shed.


“Mr. Curious”

The Fed employee promptly replied:

Dear “Mr. Curious,”

You are correct that the Detailed View does omit Long-Term Treasury Purchases. The discrepancy is inadvertent. If you follow the link to the article in the Detailed and the Summary View, you’ll see that we had initially posted these charts in between the announcement of the Agency Debt and Agency MBS purchases and the announcement of the Treasury purchases. It seems as if we just forgot to add those new purchases into the Detailed View. Thank you for pointing out our omission, and we’ll work on getting that fixed.

I’d also like to note that we are currently in the process of reorganizing the web page. Hopefully we’ll have the new page up by the end of November, and that should clear some issues up with recent announcements on reinvestment strategy, QE2 and the AIG exit plan.


Fed Employee

After receiving this response, our anonymous source observed matter-of- factly, “So the situation [on the Fed’s balance sheet] is actually a little worse than [the Detailed View] graph suggested. Without the long-term Treasurys, the balance sheet appears to have peaked in Dec 08 and since then to have wound down significantly. With the long-term Treasurys – not so much.”

Today, more than a month after this exchange between our source and the Fed employee, the identical error remains on the Cleveland Fed’s website – a situation that seems all the more remarkable in light of the fact that the missing component of the Fed’s “Detailed View” is the exact component that is expanding so conspicuously under Bernanke’s QE2 campaign.

If this little oversight causes a bit of consternation, get over it. “Oversights,” half-truths and story-telling have become as integral to the modern American economy as railroads and assembly lines were to the American economy of the mid-20th century.

In fact, half-truths and story-telling are the staples of our “confidence-based” economy. If Americans are confident, they spend, according to the prevailing economic theory of our day. And if Americans spend, the economy grows. Therefore, any statement or activity that inspires confidence is constructive for economic growth…even if the statements be false and the activities be covert and preferential.

Maybe this characterization of modern American capitalism is cynical. But we beg to differ. We think it is cynical to tolerate deception – especially institutionalized deception – purely for the sake of a short-term economic objective. We think it is destructive to look the other way while the Fed and the Treasury escort a few handpicked corporations past the red velvet ropes of capitalistic competition.

What has now emerged in America is a perverse form of privateering.

Under the 18th and 19th century versions of privateering, governments would license private firms to plunder enemy ships for profit – profits that the privateers and the governments would share.

Today, the privateering continues. But the process has been turned on its ear. Now it is we, the taxpayers, who are plundered by the government – the spoils of which it lavishes upon a select group of privileged corporations. If the “new privateers” fail, the government (i.e. taxpayers) absorbs the loss. But if the privateers succeed, they split the booty with no one but themselves.

“This is called private profits and socialized risk,” observed hedge fund manager, David Einhorn, during a presentation to the Grant’s Investment Conference in April, 2008. “Heads, I win. Tails, you lose. It is a reverse-Robin Hood system.”

But the new privateering does not only rely on socialized risks, it also relies on socialized ignorance.

Two weeks ago, a provision in the new Dodd-Frank financial reform law dragged some of the Fed’s dirty little secrets out into the light of full public disclosure. Thanks to these new revelations, the Fed finally disclosed what many of us had already suspected – that a lot of America’s biggest financial firms repaid small sums of fully disclosed federal assistance during 2009, while simultaneously accessing very large sums of undisclosed federal assistance.

These “secret bailouts” did not merely socialize risks in order to confer rewards to a few; they also socialized ignorance in order to confer valuable inside information to a few. These two processes operated hand-in-hand throughout the crisis. The insider-cognoscenti made billions while the rest of us patsies wrote the checks.

Without mass ignorance, government agencies have a tough time doing “what’s best for us.” In other words, plundering an informed populace is much more difficult than plundering an uninformed one.


Eric J. Fry,
for The Daily Reckoning Australia

Editor’s Notes: Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.

Eric J. Fry
Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short- selling. Mr. Fry launched the sometimes-abrasive, mostly entertaining and always insightful Rude Awakening.
Eric J. Fry

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