A $6 Trillion Stimulus? $4 Trillion is Discretionary Fed Money

This morning, news broke out that U.S. Senators have agreed to a $2 trillion relief package to ‘bailout’ individuals and industries most impacted by the coronavirus crisis.

However, Trump administration economist Larry Kudlow said today that the total package will actually total $6 trillion – roughly on quarter of the country’s GDP.

Indeed, the proposed bailout includes:

  • $2 trillion to help individuals, families, small businesses and corporations, and
  • $4 trillion in lending power for the Federal Reserve.

Why is the $4 trillion of discretionary Fed money hardly mentioned in the media when it represents 60% of the total stimulus package?

One reason could be because the $4 trillion will be used by the Fed to grant emergency bailouts to whoever it wants, just as it did during the 2008 financial crisis. In 2008, the rationale behind that decision was to “prompt banks to lend and help the economy but there were virtually no strings attached to the deal requiring banks to do so.

12 years later, it’s clear that experiment failed.

In reality, while most people still believe that the bailout amounted to ‘just’ $700 billion, a TARP investigation revealed that the total government bailout of 2008 actually amounted to $16.8 trillion dollars.

Incredibly, “the banks could use it [bailout money] for any purpose”, a Forbes contributor wrote in 2015, and “The big got even bigger. During the bailout the government also allowed many of the banks to use the bailout money to merge […] so the result is that they are much bigger today and have become an oligopoly that controls a huge amount of money. The 12 largest banks now control 70% of all assets“.

Could this happen again?

While lawmakers bickered over how much control the government should have over the $500 billion earmarked for corporations, very little of the same concerns were raised over how the Fed will use the $4 trillion dollars at its disposal: Will the institutions who receive Fed money be banned from doing stock buy backs? Will they be banned from using the money to “line executives’ pockets? Will they be required to re-inject it into the real economy? Will the Fed demand that bailed out industries protect jobs?

These questions remain unanswered.

For the time being, the proposed legislation needs to pass the House to be implemented. Given the highly divided political context, the process may take several days.

What is certain is that the American economy needs stimulus and Kudlow hopes that the bailout will “bolster or maintain the economy” which will, according to him, “come alive in the summer“.

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