Question:
I've read that the total bank bailout was just under 30 trillion dollars http://ritholtz.com/2011/12/bailout-total-29-616-trillion-dollars/ I don't understand the purpose of the bailout: why did the Federal Reserve give out money to the banks instead of buying up the bad mortgages? I thought that money doesn't trickle down, but instead grows and multiplies from below. Am I misunderstanding the purpose of the bailout?Answer:
Without questioning the specific numbers cited in the study, I would argue that much of the total does not represent a bailout of banks in a conventional sense. For example, $10T in central bank liquidity swaps refers to agreements between the Federal Reserve and foreign central banks (e.g., the European Central Bank) to exchange up to 10T dollars for foreign currency. Interpreting this number as a bailout is objectionable.
A bailout typically refers to assuming an ownership stake in an insolvent financial institution to keep it operational or purchasing nonperforming ("bad" or "toxic") assets of an institution at a price that exceeds the current market price. Some might also include among bailout measures providing a collateralized loan to a financial institution when the collateral is valued higher than the market price. In practice, the Federal Reserve purchased asset-backed securities from banks and lent money to banks with asset-backed securities used as collateral during the recent financial crisis. It also purchased more than $1T in mortgage-backed securities (see https://www.newyorkfed.org/markets/mbs_faq.html). Thus, it effectively became the owner of some bad mortgages you referenced.
