The confirmation hearing of Federal Reserve Chairwoman nominee Janet Yellen on Thursday will be an opportune moment for Fed critics to air their grievances. There is plenty of fodder for disagreement and debate — ranging from the Fed’s supervisory track record, to the rules for tapering large-scale asset purchases, to the criteria for ending its zero-interest rate stance.
Yet, one sure criticism is sharply at odds with the facts: That the Fed’s crisis response was an insider affair, run by and for a handful of too-big-to-fail banks.
While the Fed’s actions in response to the 2008 financial crisis are certainly open to criticism, the creation and expansion of various credit and lending programs were aimed at calming the financial markets and maintaining the liquidity of specific financial instruments. It was not about befriending winners and giving the cold shoulder to losers.
The exception that proves the rule was the Fed’s early institution-by-institution firefighting; for example, addressing the problems of Maiden Lane I-III, Bear Stearns and American International Group. In each of these cases, the Fed provided support to individual firms in order to avoid a disorderly collapse. However, as a financial “disturbance in the force” started to move through the system — slowly at first, and then rapidly — the Fed attempted to provide liquidity with the hope of containing the disruption.
The Fed was practicing an amped-up version of its lender of last resort role by “lending freely, against good collateral,” as prescribed by Walter Bagehot’s famous 1873 dictum.