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« How Hank Paulson Warned Hedge Funds In Advance | Main | MUST SEE - Bernanke's Stealth Bailout For Wall Street Kept Secret From Congress »

The Unbearable Lightness Of TARP Reporting

Originally published in September 2010.

A new academic paper by economists from MIT and the NY Fed proves that credit markets were NOT "frozen" during the crisis.


Monday was the second anniversary of the failure of Lehman Brothers.  And it was two years ago tomorrow that Hank Paulson and Ben Bernanke met with the Congressional leadership in a conference room on Capital Hill, telling them that the entire economic system would cease to function if they didn't pass a bailout bill.  One of the things Paulson and Bernanke told the members -- something that was repeated over and over, and continues to be repeated -- was that the credit markets were "frozen."  Banks, they said, would not lend to each other.  If this were true, it would be very bad indeed.

But it wasn't true.  The credit markets were not "frozen."  Banks were lending to each other.  The credit markets were functioning.   And now we have a study, by two economists from the NY Fed and one from MIT, that proves it.  In "What Happened to US Interbank Lending In the Financial Crisis?," Gara Afonso, Anna Kovner and Antoinette Schoar show that despite claims of a credit "freeze," it never happened.  Some theoretical studies, they note, suggest that fear in the interbank markets could be contagious and would lead to a total freeze, but the authors of this study simply looked at the available data.  (Crazy, I know.) 

It should be no surprise to regular readers of The Daily Bail, but the NY Fed's own data show that interbank lending during the period from September to November did not "freeze," collapse, melt down or anything else.  In fact, every single day throughout this period, hundreds of billions were borrowed and paid back.  The decline in daily interbank lending came only when the Fed ballooned its balance sheet and started paying interest on excess reserves.

(Afonso, et al. 2010)

And yet, even to this day, TARP apologists and their clueless handmaidens in the media continue to talk of a credit "freeze."  A credit freeze that didn't happen.  As he mindlessly praises the "success" of TARP, Ben Smith of Politico is just the latest media clown to make this simple mistake (and Dan Amira of Daily Intel cites him approvingly).  Forget, for just a moment, the fact that TARP, along with an alphabet soup of Fed lending facilities and FDIC guarantees on bank bond issuance, helped to subsidize Jamie Dimon's bonus and Lloyd Blankfein's cappucino machine.  One would think that mere curiosity, or even fear of embarrassment, would inspire journalists who bother to write about this stuff to do a little research.  Alas, no.  Any journalist worth his salt -- heck, any twelve-year old -- could find the Afonso-Kovner-Schoar study with a simple Google search.  (Is it any mystery why people who have paid attention over the last two years hold mainstream journalists in contempt?) In any case, for the sake of convenience we've reposted the study here.


From VoxEU.org

What happened to US interbank lending in the financial crisis?


Many commentators have argued that interbank lending froze following the collapse of Lehman Brothers. This column presents evidence from the fed funds market that, while rates spiked and loan terms became more sensitive to borrower risk, mean borrowing amounts remained stable on aggregate. It seems likely that the market did not expand to meet additional demand for funds.

Borrowing in the interbank market is the most immediate source of bank liquidity and, aggregate activity in the market can therefore be an important indicator of the functioning of the banking market. Problems in this market can lead to insufficient bank liquidity and thus to inadequate allocation of capital and risk sharing between banks. In addition, the (overnight) interbank rate, known as the fed funds rate in the US, is the main mechanism through which US monetary policy is channelled. This raises the question whether the interbank market mitigate or amplify shocks to individual banks and the banking sector overall.

Many recent economic theory papers predict a market freeze if lenders cannot assess bank-specific risks or fear liquidity shortages. We argue that observed conditions in the overnight fed funds market after Lehman Brothers’ bankruptcy do not support these hypotheses.


While we appear to document a functioning fed funds market immediately after the Lehman crisis, we only measure loans that were made, not all the loans that banks might have wanted. Presumably, demand for funds increased at the same time, so unmet demand may have been a problem. There was increased demand for discount window borrowing. However, banks that accessed the discount window were likely to be less profitable. Thus, while we cannot rule out that some banks were screened out of the market, the turmoil in the interbank market cannot have been so big that completely normal and solvent banks had to turn to the discount window for liquidity. This provides further evidence that the interbank market was not completely frozen through the crisis.





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Reader Comments (19)

Search and destroy 1.0 has now commenced...
Sep 17, 2010 at 11:07 AM | Registered CommenterDailyBail
WASHINGTON (MarketWatch) — The Treasury Department’s “ineffective” handling of the $700 billion Troubled Asset Relief Program makes it more difficult for the government to respond to future financial crises, a key congressional watchdog said Thursday.

“The early change in TARP strategy from asset purchases to capital injections, followed by the rollout of numerous seemingly unconnected programs, combined with largely ineffective communication of the reasoning behind these actions, spread confusion in the public and undermined trust in the TARP,” the Congressional Oversight Panel said in its September report.

“The greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises.”


I wonder if Ben Smith even reads outside of his sphere of selection...
Sep 17, 2010 at 11:48 AM | Registered CommenterDailyBail
Sep 17, 2010 at 11:50 AM | Registered CommenterDailyBail
Specifically, the legislation that was approved in a Senate vote Thursday would prohibit a TARP recipient bank that has been more than 60 days late on making a dividend payment to the government from refinancing into the new program. That legislation will need to go back to the House for final approval and will then need the signature of President Barack Obama, who has actively campaigned for the passage of the bill.

Sep 17, 2010 at 11:51 AM | Registered CommenterDailyBail
Z...i want an honest answer to this question...

Did you go to Clusterstock and make this comment on Pitchfork's story...

"From Woody Allen on Faith, Fortune Tellers and New York http://www.nytimes.com/2010/09/15/movies/15woody.html?_r=1&src=me&ref=general#

A. For some reason, the press wanted to say bad things about her [Carla Bruni-sarkozy]. I don’t know if they had something against the Sarkozys, or it was a better way to sell papers. But the fabrications were so wild and so completely fake, and I wondered to myself, Is this what happens with Afghanistan and the economy and matters of real significance? This is a trivial matter. That’s a longwinded answer to your question: I was not prepared for the amount of press that was attached to the picture because of Madame Sarkozy.

Woody has always had terrific insights on life and our foibles.

Read more: http://www.businessinsider.com/the-2008-credit-freeze-never-happened-and-tarp-accounting-was-a-lie-2010-9#ixzz0zo331WcW"


i want an honest answer...was that you...
Sep 17, 2010 at 12:48 PM | Registered CommenterDailyBail
Sorry, I did not see this question until Friday around 4:20...I was not ignoring your question...

No, I did not post that. In fact, I don't know if I have ever been to that site until now. It says that the post was made by Tim Coldwell. Based on the nature of his comment (Woody Allen), he may be this guy...


...a director and member of ?Circus Oz?...

This is probably him too...notice France 24 English in interests...


So, again, this is not me. His comment doesn't even make sense to me? You know I am a big fan of movies but who gives a f*** about Woody Allen. He did some good stuff many many many years ago and since then he uses A list stars at the peak of their popularity to make shitty art films. I didn't even like Vicki Christina Barcelona and I am a huge Penelope Cruz fan.

Hope this helps.
Sep 17, 2010 at 4:42 PM | Unregistered CommenterZ
I'm glad it wasn't you...it was a strange post...
Sep 17, 2010 at 5:54 PM | Registered CommenterDailyBail

"You know I am a big fan of movies but who gives a f*** about Woody Allen. He did some good stuff many many many years ago and since then he uses A list stars at the peak of their popularity to make shitty art films. I didn't even like Vicki Christina Barcelona and I am a huge Penelope Cruz fan."

Haha. Same here.
Mar 1, 2011 at 2:59 PM | Unregistered Commenterspideydouble
Another outstanding post already saved in the reference links file.

Also noteworthy is that it got picked up by AJ's crew.

Mar 15, 2011 at 9:35 PM | Unregistered CommenterCheyenne
Chosen reporters were supporting the chosen story out of our chosen federal reserve. All is well that ends well. I think you people are too anti-american leftists.
Mar 16, 2011 at 2:14 AM | Unregistered CommenterDr. Kissinger
Dr. K--

Good stuff but for your conclusion. I'll put my right-wing creds against yours any old day of the week. But that lends too much credibility to the right-left sock puppet show that sheep find so enthralling these days. Lots of changes since 1984, just don't tell Brinkley's Weekly Sunday Morning Cadaver Breakfast Show.

There are two parties in the U.S. now. The Bailout Party, which accounts for 0.1% of the population and includes Bernanke, Paulson, Geithner, and Obama. (That's two Reds and two Blues if you're keeping score on an abacus.)

And then there's the Suckers Party, which is 99.9% if the population. That means you and me and pretty well anyone reading this.

Though wealth is divided between the parties evenly enough, the Suckers are getting creamed because so many of them argue left-right sock puppetry when they're not asleep.
Mar 16, 2011 at 9:48 PM | Unregistered CommenterCheyenne
Disinfo warning.

A deliberate shrinking of the money in circulation IS occuring.

Was before 2007 ca 80 billion dollars sitting Fed accounts (out of circulation). As of summer 2011 ca 960 billion dollars sitting out of circulation.

Jul 21, 2011 at 2:58 PM | Unregistered CommenterAnonymous
It was an obvious theft then, and the thieves are still loose. The next scam is the European bailout. This may dwarf the 2008 bailouts and drag U. S. taxpayers into it. There are a lot of rumors about the Fed getting directly involved. One story quotes Obama as pushing for it.

Nov 28, 2011 at 7:25 PM | Unregistered CommenterGeorge Forfa
Federal Reserve Warns Banks Too Big To Fail

Nov 28, 2011 at 10:20 PM | Unregistered Commenterjohn
Nothing to do with TARP but here is some good news. Iraq Vet Scott Olsen was released from the hospital yesterday and did a video interview.


He still has difficulty speaking....and authorities are still investigating the matter.
Nov 29, 2011 at 11:54 AM | Unregistered Commenterchunga
I sure hope Scott has some recorse. He is standing there watching and doing nothing. A "Thug Cop" shoots him point blank and hes is like this today......Is this America........?
Nov 29, 2011 at 10:52 PM | Unregistered CommenterTexas Dar
......Is this America........?

Yup! Welcome to the United Corporate Fascist States of Amerika. The new reality for the 21st. Century.
Dec 3, 2011 at 11:56 AM | Unregistered CommenterSagebrush
It sure as shit isn't good. Jon Corzine just filched $3 billion out of American pockets--wealthy Americans, who might not have digged what #OccupyWallStreet had to say--and yet he's still walking around free.

If any contributor to Steve's site tried to pull this shit--say, forging a check--we're going to jail pronto.

That money from MFG ain't "missing," it was stolen. Look. I got good and liquored up last night, and may have wound up a dime short. But I can get the complete truth from one (1) visit to the ATM machine. Then I know whether I visited an extra place or dropped a brick on the way to my truck.

Jon Corzine is a thief. But yet it's the very magnitude of his loot--$3 billion and counting--that prevents the American populace from expressing outrage.

No worries. Lots of dudes worth $10 - !00 million discovered the truth, and now that knowledge is gonna trickle down. Eventually the Occupy Movement and the original Tea Party are gonna come together. And when they do, that is gonna be a party one doesn't want to miss.

TPTB--in vespers of incredible futility--don't want that to happen.

And that's too fuckin bad.
Dec 3, 2011 at 7:41 PM | Unregistered CommenterCheyenne
You ever wander into some dickhead saying they paid their TARP back? Fuck, I do all the time, which forced me into making a cassette recording of me blasting the kool-aid drinkers out of the county.

"Paid their TARP back, is that what the fuck you said" I paraded around in my scandalous underwear. Then I remembered the superhero, Reggie Middleton.

"Did they pay their TALF back? Did they pay their PPIP back?"

I thought his intro was stronger. It didn't sound as intimidating when I said it aloud. But fuck it.

"Did they stop borrowing for free? Did they pay back for the food stamp license?"

Now heads were starting to turn.

It's always like this. There is the cogniscenti, and then there's life. And life is hard and full of morons--even ones you love so very dearly--and it is painful. And in the end, when you're at last proven right, you'll be blamed. And you'll take it on the chin 'cause that's taking one for the team.
Dec 3, 2011 at 10:01 PM | Unregistered CommenterCheyenne

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