It was a staggering claim that quickly made the rounds in Washington last week: that the Federal Reserve had handed out $7.77 trillion to big banks at the height of the financial crisis. “The Fed fought to keep the details of the loans, which totaled $7.77 trillion, secret long after,” proclaimed ABC News. “There was no debate over the $7.7 trillion the Fed gave the banks,” thundered Rep. Dennis Kucinich (D-Ohio). It all followed a Nov. 27 Bloomberg story showing how individual banks had profited after receiving support from the Fed.
Problem is, the Fed never actually doled out $7.7 trillion to banks: Much of that $7.7 trillion figure doesn’t reflect loans made, but loan guarantees — the amount the Fed would be responsible for in case of default — and loan limits. Certainly, the Fed positioned itself to take on considerable risk if need be, but the central bank was not handing out $7.7 trillion in cold, hard cash to banks. Politicians and the news media alike have erroneously conflated the two, using “loan guarantees” and “loans” interchangeably. The Fed would have given out $7.7 trillion to banks only in the unlikely scenario that the banks asked for the maximum possible loans and that every one of them subsequently defaulted.
I feel better already.