The Fed and Crony Capitalism

I will leave aside the issue of the recently revealed massive loans from the Fed to various banks.  It can be argued that being the provider of last resort for short-term liquidity in the banking system is a legal, even legitimate, role for the Fed.

But scan this list.  Here are some of the "banks" that got close near-interest-free money from the Fed

  • Verizon
  • Chrysler
  • Caterpillar
  • Harley-Davidson
  • Baxter International

I presume these loans were nominally for their financing arms, but what is the systematic-risk argument for backstopping manufacturer's credit operations?

When I was at McKinsey & Co, part of their relocation package was a $10,000 interest-free one year loan.  I had any number of new recruits say they did not need the loan.  I told them it was a business IQ test.  If you turned down the loan, we revoked your job offer (just kidding, of course).  I took the loan and dropped it into T-bills.

I wonder how many of these recipients really needed the money to survive or just got smart enough to claim dire need and took the money and just dropped it into something interest-bearing.

  • me

    At the end of the day, we get the government we deserve. This is just another one of those hilarious abuses of tax moneys that keep getting me closer to my first ulcer. We've been sending jokers from both the Republican party and the Democrats to Washington, and this is the kind of idiotic behavior we keep getting back in return. Come next election, do yourself a favor and try to find a candidate who doesn't have a track record of being part of this wasteful behavior and give them a chance. Even if they are unlikely to make it, there is a chance that some competitive pressure might stir up the political scene and, at least, make the current set of crooks behave more responsibly in the future.

  • http://herdgadfly.blogspot.com/ gadfly

    I read somewhere that Ford also sucked up some large government-backed loans at very low rates which have exceeded $5 Billion.

  • steve

    My mother used to work for a branch of the Rural Electrification Corporation in the 50's as a secretary. They used to get low interest loans from the government. My mother said her boss did exactly what you describe.

  • joshv

    You apparently don't read your comments, as we made it clear the last time you posted your 'intelligence test' that it can be entirely rational to reject the 10k interest free loan. Even at long ago risk free rates of return, 3-4%, this would net you about 300-400 dollars, and require time and energy to manage. Company paperwork, transferring the money into a CD, cashing out the CD, repaying the money - several hours of time at least. Granted, if I were allowed to do this over and over again, I'd turn it into a full time job as the hourly rate could be rather high with practice, but as a one off - meh, it's not enough money to even worry about if you don't need it.

  • Mark

    @Joshv I agree with you totally. But in addition, should point out we are not perfectly rational people, and not all of us would be able to resist the temptation to use the money, either splurging on something, or because there is some family trouble. Using the money to take the "easy way" out of a crisis, will result in a loan due 1 year out, and no money to pay back the loan.

    Or a person my use the money to purchase that "hot stock" pets.com, instead of safe treasuries, and end up with zero dollars at the end of the year when it crashes.

    I would avoid the one year loan just to avoid the temptation. It is not a stupid decision.

  • Mark

    Note on "easy way out" above. If I had a crisis, I could stop drinking my daily $4 latte, put off purchasing a car another year, etc, etc. Go to the movies less. But with a temporary 10 grand in the bank, I would have less incentive to do those things so could end up in worse shape.

  • joshv

    Good point Mark, not an issue I'd considered as I personally have a bit more financial discipline than that. But I can see how many folks might be tempted to put it in the stock market, or spend more on discretionary purchases knowing they have the 10k as a fall back.

  • Sebastian

    Such is the schizophrenic nature of the world economic system that US Bank credit ratings are falling while the Dow is on a holiday tear. The system looks good on the outside, but it's hiding a cancer: http://djia.tv/press-tv/top-us-banks-credit-ratings-fall/