Bernanke: the taxpayer's best friendMay 24, 2010: 5:11 PM ET
Ben Bernanke's Fed gets a clean bill of health from the Congressional Budget Office.
A CBO estimate released Monday says Federal Reserve programs to support the financial sector have been a bargain for taxpayers. The so-called fair value subsidy – measuring the cost of the risk the central bank has assumed – amounts to just $21 billion, the CBO says.
That compares with an initial estimate of $189 billion in Treasury's Troubled Asset Relief Program, which saw the government buy preferred stakes in big banks at prices below those being offered by private investors.
What's more, CBO director Douglas Elmendorf says, the way the budget office calculates the subsidy probably understates the good that came out of Bernanke's interventions in the economy.
"It bears emphasizing that CBO's fair-value estimates address the costs but not the benefits of the Federal Reserve's actions," he says on the budget watchdog's blog. "In CBO's judgment, if the Federal Reserve had not strategically provided credit and enhanced liquidity, the financial crisis probably would have been deeper and more protracted and the damage to the rest of the economy more severe."
The Fed has more than doubled its holdings of financial assets, first by providing hundreds of billions of dollars of liquidity via special lending programs and then by buying more than $1 trillion of mortgage-related bonds.
All told, the programs have expanded the Fed's balance sheet to a record $2.4 trillion.
Of the various programs the Fed has run, only one – the Term Asset-Backed Securities Loan Facility, or TALF – comes out of the CBO review as costly for taxpayers. TALF, which provides government backing for credit card, student and car loans, amounts to a $13 billion subsidy, the CBO says.
No other program registers a subsidy of more than $2 billion, and many show a zero. Even the Fed's program to buy mortgage bonds backed by Fannie Mae (FNM) and Freddie Mac (FRE) shows no subsidy, thanks to the way subsidies are calculated:
"If the Federal Reserve purchases the security at a fair-market price, equivalent to what private investors would have paid, then the purchase creates no economic gain or loss for taxpayers; the price compensates the central bank for the risk it has assumed," the CBO says. "By contrast, if the Federal Reserve purchases a risky security for more than the amount that private investors would have paid, it gives a subsidy to the seller of the security, creating an economic loss, or cost, for taxpayers."
The mortgage purchase program did buy bonds in the market, which by definition is a fair value transaction. Of course, the worry with the mortgage purchase program is that the Fed is buying long-lived assets at a time of severe economic stress and unusually low interest rates – that is, at a time when the bonds are overpriced.
While the Fed has made it clear it would like to return to its pre-crisis state and rid itself of unusual holdings like the mortgage bonds, it has also been upfront about the fact that it could take years to do so. If interest rates spike in the meantime, Bernanke and his peers could find themselves holding a portfolio full of bonds that can't be sold into the market without the Fed taking a loss.
None of this seems hugely pressing at a moment when the yield on the 10-year Treasury note has fallen to 3.19% from 4% last month, amid fears that the euro zone will be swept away in a wave of deflation. But with $1.3 trillion sitting idle in bank accounts at the Fed thanks to Bernanke's largesse, it's too early to say the Fed is in the clear.