The commentary on the crisis information recently released by the Fed has devolved into a dispute about the “correct” way to interpret the data. But this dispute obfuscates the important questions raised by the Fed’s actions. A good analogy for understanding what took place is to think of the Fed as the provider of shelter in a storm:
There was hurricane going on outside and the banks needed shelter. The Fed provided the shelter. But it turns out the shelter wasn’t just for one night and it wasn’t just for one bank. The Fed provided shelter to all the banks for months on end. Some banks were sheltered at the Fed for more than a year.
It is this long-term aspect of the Fed’s “emergency” lending that forces one to question whether this was emergency lending at all. And raises the following questions:
Did the banks have a duty to construct their own shelters to weather the hurricane?
Or is the Fed their liege lord with a duty to protect them? If the Fed has a duty to protect the banks in a hurricane, then what is the likelihood that the existence of that duty is the reason the hurricane lasted so long? (These storms are clearly not acts of God, but entirely endogenous to the actions of the banks.)
By providing such extensive shelter, does the Fed discourage the banks from building their own storm-worthy shelters?
Did the banks pay a fair rate for the shelter? Did they just do the dishes every night or did they pay a “normal times” market rent of say 5% of the market value of the shelter per annum or did they pay a rate closer to the value to them of the shelter? Aren’t liege lords entitled to something like a third of their clients’ gross revenue annually in good times and in bad?
What about the decision the Fed makes about who gets shelter? Does the Fed provide shelter to all the banks, or only to a select few banks? Should consumers — or non-financial firms — have access to this shelter? If not, why not?