What does it all mean?

You can read this article or not.
It would probably just confuse you as much as it has me.

The Federal Reserve Bank has loaned 2 trillion dollars since September 2008.
These loans are distinct from the $700 billion TARP "bail out", and is tracked and managed even worse than the TARP funds have been. The Fed doesn't want to say who they loaned the money to, or what collateral they received, or how that collateral was valued. See clip

Basic accounting is for a bank to record loans made as the bank's assets, and customers deposits as the bank's liabilities. If the two trillion dollars are Fed Reserve Bank assets, what are the offsetting liabilities?

I feel naive in asking, but aren't the Fed's liabilities the federal reserve notes we all carry around and use as currency and consider to be money? Traditionally, I thought fed printed reserve notes (currency) to buy treasury notes from the banks. Doing so increased the currency in circulation and would drive interest rates down. Alternatively, the fed could sell treasuries in the open market, reducing the money supply and causing interest rates to rise. I thought that was the way it was supposed to work.

The Fed was supposed to influence interest rates while keeping an eye on inflationary effects of these market transactions. Too much currency pumped into the banking system would keep interest rates low but lead to inflation. Once people realized the purchasing power of their money was being reduced by the increase in the supply of money (more money chasing the same amount of goods would increase price levels), they would prefer to hold other assets than currency, and if they did keep money on deposit in their accounts they would demand to receive higher interest rates in return. So simultaneously keeping interest rates and inflation as low as possible was the job of the Fed Reserve Bank.

The Fed also managed the reserves the banks were required to keep on deposit with the Federal Reserve Bank. This reserve was to be used to loan to a bank in case a transitory financial crisis caused a run on the bank by its depositors. That way the bank wouldn't have to call in loans to pay off depositors.

Janett is telling me it's time to run an errand, so let me wrap it up for now by saying the Fed used to print money and hold Treasuries to back up the value of the currency printed. What we're seeing now seems to be the Fed printing vast, huge, immense amounts of currency to bail out the banks and accepting absolute garbage as collateral.



Later...I haven't figured out what happens when the banks tell the Fed "We can't pay you back, so I guess you can keep the garbage."

PS Incidentally, news reports that some banks are willing and able to pay back the TARP funds to the Treasury, and hope to escape ongoing scrutiny once the TARP funds are repaid, probably have more to do with the Fed's surreptitious loans to the banks than it does with banks having "recovered"

The two trillion dollars figures out to be $7,500 per man, woman and child in the country. I don't think we're all going to receive equivalent benefits, but will probably pay some proportionate cost. The idea apparently is to get the banks off the hook for all the bad loans they profited in making and, through the Fed, to pass the cost along to the citizens.

PS If these loans were made to the banks to cover losses on mortgage securities, how will losses on consumer credit, car loans. student loans, corporate debt and governmental debt be taken off banks' books as the impending defaults occur? Just push that all onto the Fed's books as well? I don't understand what it means if the Federal Reserve Bank is bankrupt except that the currency must ultimately be recognized as worthless. Which takes us back to where we were three or four years ago when I was explaining why I saw gold as a good investment.