by Calculated Risk on 12/06/2011 01:38:00 PM

There was a Bloomberg article last week that I ignored (it appeared inaccurate to me).

Fed Chairman Ben Bernanke has responded today. This includes a staff memo. (Click on the link for the entire memo).

A excerpt:

[O]ne article incorrectly asserted that banks "reaped an estimated $13 billion of income by taking advantage of the Fed's below-market rates." Most of the Federal Reserve's lending facilities were priced at a penalty over normal market rates so that borrowers had economic incentives to exit the facilities as market conditions normalized, and the rates that the Federal Reserve charged on its lending programs did not provide a subsidy to borrowers.

My comment: This is the Federal Reserve doing exactly what it should during a financial crisis: lending freely at a penalty rate on good collateral. Walter Bagehot wrote about this in Lombard Street (1873):

If it is known that the Bank of England is freely advancing on what in ordinary times is reckoned a good security—on what is then commonly pledged and easily convertible—the alarm of the solvent merchants and bankers will be stayed. But if securities, really good and usually convertible, are refused by the Bank, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse.

I've criticized the Fed, sometimes harshly, and especially about the lack of regulatory oversight during the housing bubble. But this is the Fed acting as lender of last resort and I think this criticism was both inaccurate and way off base.