Tuesday, May 26, 2015

Bailout barometer

The Richmond Fed updated its "bailout barometer," at left. Post here and longer report here. (WSJ coverage here)

I found the numbers and the table from the longer report interesting as well. Guaranteeing more than half of financial sector liabilities is impressive. But most of us don't know how large financial sector liabilities are. GDP is about $17 Trillion. $43 Trillion is a lot.

This is only financial system guarantees. It doesn't include, for example, the federal debt. It doesn't include student loans, small business loan guarantees, direct loan guarantees to businesses, the ex-im bank and so on and so forth. It doesn't include non-financial but likely bailouts like auto companies, states and local governments, their pensions, and so on.

Guaranteeing debt subsidizes things off budget. Of course, the chance that the government will have to simultaneously pay all these claims at once in full is small. But the chance that substantial debt guarantees might have to be paid is no longer vanishing.


  1. Does anyone have any information on the average rate of interest charged by the Fed to commercial banks for the $13 trillion loaned during the crisis? Warren Buffet charged Goldman Sachs 10% which is perhaps in line with Walter Bagehots’s “penalty” rate. But certainly some of the Fed loans were at 0% near enough.

  2. 10% on the loan portion of the convertible preferred, the equity option isn't included in it!

  3. John,

    How many of these liabilities are circular claims - bank A borrows from money market B who borrows from pension fund C who borrows from bank A?

    It seems odd that when circular debt claims exist, the government is called upon to make all creditors whole by absorbing rather than cancelling debts.

    1. Now there’s an interesting question. My answer….

      Disentangling “circular” debtor / creditor relationships from simple or non circular ones would be impossible. Plus banking basically consists of setting up debtor / creditor relationships (i.e. arranging for one entity to obtain goods and services from another without paying immediately) and then cancelling those debtor / creditor relationships as best it can. To the extent that the bank system cannot do the latter, I doubt that government WOULD DO any better.

    2. Ralph,

      But that is what government is tasked to do under bankruptcy law - though the law probably isn't up to snuff with the state of modern finance. Nonetheless, trying to do that may still end up being less expensive than making all creditors whole.

      I borrow $1000 from Jane who borrows $1000 from Pete who borrows $1000 from me. Pete suddenly can't repay Me so I can't repay Jane so Jane can't repay Pete.

      Should government intervene (via bankruptcy law) and try to cancel the circle of debt or should government intervene and issue $3000 worth of bonds to make all of us creditors (me, Jane, and Pete) whole?

      The problem becomes more complex when credit instruments (debts) are sliced and diced and then sold all over the world (see mortgage backed securities).


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