The Free Market Revisited

Government report showing how capital is really allocated in the country.

In a recent blog titled Free market Illusion, the author argued that when the United States government transfers over $17 trillion dollars to the investor class we do not have a free market, we have “Socialism for the rich and austerity for the rest of us.”

The amount was questioned because if our government actually transferred $17 trillion dollars, which is more than the country’s annual GDP and more than the entire national debt, to private entities the argument that our economic system is based on  market principles would be laughable.

Actually $17 trillion is short of the amount of dollars our government actually passed out during the financial crisis.

This is all covered in GAO-11-696 (Available on the Government Accountability  Office web site) showing the nineteen programs and money dispersed by the Federal Reserve Board between December 1, 2007 and July of 2010. The report is staggering and one can understand why the Fed fought making this information public.

Detailed information on each program is specified in each program’s appendix.

Here are some of the highlights of the report:

Appendix XI – Primary Dealer Credit Facility and Credit Extensions for Affiliates of Primary Dealers. (PDCF).

Table 25 shows that this program dispensed $7.3 trillion in loans.

Appendix IX – Dollar Swap Lines with Foreign Banks. Table 24 dispensed $10 trillion dollars.

We’re over $17 trillion already, and we still have seventeen programs to go. If you add up the total amount of money dispersed it would exceed $20 trillion.

But that is not the end of the story. The Fed set up the programs but paid private institutions billions of dollars in fees to run the programs. Morgan Stanley not only received $1.3 trillion in loans from the PDCF program (See Table 25 in the report) but also acted as a vendor for other programs receiving hundreds of millions of dollars in fees.

Non-banking entities were also beneficiaries of these programs. PIMCO, a mutual fund, received $7.3 billion from the Talf program which dispersed over $71 billion (Appendix VII, table 25). PIMCO also was awarded over $100 million in fees for acting as a vendor for the very same program that awarded it $7.3 billion in loans.

If you want to understand how the allocation of capital in our economic system really works download a copy of the report and spend a few minutes looking at the tables and the charts that show the flow of money and the interrelationship between the government and the private sector.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Tim May 16, 2012 at 12:43 AM
I did read the report, and find it odd that you have left out that the outstanding balance on many of those loan programs as of 2011, is $0. The PDCF? $0 outstanding. With a peak at any one time of $130B, all of which has been paid back for over a year. The Dollar Swap Line? $0 outstanding balance. With a peak at any one time of $530B, all of which has been paid back for over a year. What you actually are quoting, is the total of all the loans combined, many of which were paid for by the repayment of previous loans. This piece seems to be implying that this money was 'given' away. But that is not what happened, and I'm not sure if you either misunderstood the definition of 'loan' or just ignored it. By taking a single piece of the total money supply(loans), and ignoring the rest(repayments and production), you are coming to some very incorrect assumptions, which will no doubt lead to very incorrect conclusions. Now, I can agree with the desire to have these programs priced out to the best bidder, but the circumstances of the times made that a practical impossibility. Sometimes, when there is a disaster, the government can act the fastest. I don't know about you, but I don't want to price out to the highest bidder who bulldozes the streets after a devastating tornado. Nor, would I want to sit around and wait while the processes needed during the financial crisis were 'bid out'.
Don Damon May 16, 2012 at 04:02 PM
Tim, you're right. The writer is either a major user of selective editing ... or just doesn't understand his topic. Since, in the case of the Dollar Swap Line the report clearly stated that the amount outstanding never exceeded $530B the use of the $10T number was clearly just wrong. I could also use a definition for "investor class" since, among friends and neighbors I couldn't find one adult that didn't have some connection to investing (and NONE of the people I asked are in the much despised 1%). Some regular middle-income folks actually directly invest in equity investments. Some have investments in 401k retirement accounts that then invest in private sector America. Even those with defined benefit retirements (like the Illinois TRS, for example) depend on the fund's investments. The "investor class" sounds like most of us.
ron kurowski May 20, 2012 at 04:04 AM
No, Don the $to trillion number is not wrong. Th $560 billion figure is maximum amount of money "at risk" to the Fed at any one time for that particular program. Look at table 25. It lists the institutions and the amount of monies each received. At the bottom of the table is the total amount of money actually loaned which is over $10 trillion.
ron kurowski May 20, 2012 at 04:59 AM
Actually I was not trying to imply that the money was given away. The report, which I actually encouraged readers to read, and as you have indicated, clearly shows that that all loans were repaid. The fact that the loans were paid is irrelevant to the question Mr. Torrence raised in his post. How can an economic system be considered to be working under free market principals when the government finds it necessary, and I did think it was necessary, to stabilize that system by infusing it with amounts of money of historical proportions. It surely can't be called a free market where the market corrects itself without outside intervention. And if the government does have to intervene during times of crisis then that government has a responsibility to regulate the markets and institutions which make up the market to prevent those kinds of crisis in the future. And it is the idea of any kind of regulation that the "free market" proponents, like Jamie Dimon, are fanatically trying to prevent. David Stockman when asked what kind of system we have, said, "It is not free market capitalism. And it isn't a democracy. It is crony capitalism".
Don Damon May 20, 2012 at 11:52 AM
Well, ron, I guess it is a matter of perception. Say I loaned you $10 every week on Monday and you paid it back on Wednesday. If, after a year someone asked how much I loaned you I would reply $10 dollars. I never had more than that outstanding to you and it never took more than $10 from my pocket. Only if I wanted it to sound negative would I try to do that by summing up the $10 loans and say I loaned him over $500. It sounds much worse ... but I never loaned you $500. I loaned you $10 many times. The total risk IS important to answering the question. Unless you have a purpose to spin it otherwise.


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