Fed Bailouts Itemized

Calculated Risk has itemized the $13.9 trillion of obligations that the Fed and other agencies are authorized to participate in as bailouts/guarantees under the various financial crisis bailout programs it is involved in at this point.

Some, like a guarantee of $3.2 trillion of money market funds against breaking the buck are extremely unlikely to result in any meaningful liability for the Fed. Another big group of programs involve buying commercial paper (i.e. short term debt obligations of large companies with good credit which used to be financed by banks). Other programs involve some risk to the Fed or even carry a significant risk of actually resulting in a loss.

It is hard to evaluate what the probable exposure of the federal government is in these programs in good, typical, bad and worse case scenarios. Realistically, it is much less than the face value of the guarantees and loans. Even if these loans went into default, the federal government players would get some return.

Some observers have called the Fed action inflationary, but there are real reasons to doubt this conclusion as well. A guarantee of an existing obligation wouldn't normally be counted as a change in the money supply. Neither would a purchase of an existing debt, which is what the TARP program was conceptualized as doing. And, the reason the Fed is buying commercial paper from private parties in the first place is that the supply of commercial paper had contracted in a comparable amount when banks and other commercial paper investors stopped making commercial paper loans. Very few of the federal government programs listed in the $13.9 trillion figure include new loans of a type that weren't being provided by the private sector prior to the financial crisis.

Also, inflation is hard to hide. It is one of those economic phenomena that is devilishly hard to understand the mechanism behind in detail, but very easy to observe on the street. Interest rate markets, retail prices and commodity prices respond very quickly to changes in the money supply even in relatively primitive economies with little or no centralized statistical monitoring. Yet, we aren't seeing soaring core consumer price index commodity prices or soaring interest rates. Other than a brief spike in interbank lending rates and a big increase in the spread between the interest rates charged to businesses with good credit and those charged to businesses with bad credit, interest rates have remained remarkably low throughout the financial crisis. Real estate and financial asset prices have collapsed, other asset prices have been fairly steady (although oil prices are starting to creep up again after economic contraction led declines), and lenders have responded to default fears by not lending rather than by increasing interest rates.

In other financial crisis news:

Industrial capacity is being used at a rate which is a record low since data were first kept in 1967. Just 68.3% of the nation's industrial capacity is being used.

April housing starts were at the lowest level since data were first kept in 1959 at 454,000. They have rebounded slightly in May to a still very low 532,000. At the peak of the housing start boom in 2006 there were about 2,250,000 housing starts. (All of the housing start data is on a seasonally adjusted annual rate basis).

Updated with analysis at about 3:40 p.m.

UPDATE TWO: 6-17-09 at 3:15 p.m.: Prices haven't deflated so much since April 1950, and core inflation for May was very low.