The Fed Only Kind of Ended “Too Big to Fail” Lending

After the banks foolishly played with our money and lost, the U.S. government bailed them out with the Troubled Asset Relief Program to the tune of $475 BILLION. The bankers were given the keys to the kingdom, so naturally they gave themselves bonuses and raises, while a former Goldman Sachs investment banker (and current nominee to run the Minneapolis branch of the Federal Reserve) demanded we all look the other way.

Despite the banks paying back the government (plus interest), the response to TARP and how the money was squandered was less than enthusiastic, so now the Fed has adopted a new rule that “limits its ability to lend emergency money to banks.”

As CNN Money reports:

The Fed's new restrictions come from the Dodd-Frank Act of 2010, which brought in a wave of reforms after the financial crisis.

Under the new rule, banks that are going bankrupt -- or appear to be going bankrupt -- can no longer receive emergency funds from the Fed under any circumstances.

If the rule had been in place during the financial crisis, it would have prevented the Fed from lending to insurance giant AIG (AIG) and Bear Stearns, Fed chair Janet Yellen points out.

But of course, there’s a catch (you didn’t forget that the U.S. government in charge of this, right?). As Senator Elizabeth Warren, who is rightfully critical of the new rule, told CNN Money, "There are still loopholes that the Fed could exploit to provide another back-door bailout to giant financial institutions."

The idea is the Fed can still lend to banks during times of emergency, but the bank must be able to pay it back. Yet the true health of a bank in turmoil can be very difficult to assess.

"It's very hard to judge in real time whether a firm is insolvent or just having liquidity problems because it becomes impossible to price assets," says Paul Ashworth, chief U.S. economist at Capital Economics, a research firm.

That's why Warren wants clearer guidelines.

"It's up to Congress to close those loopholes and ensure that Fed emergency lending is limited to protecting the economy and not to saving a few favored banks," Warren says.

Again, the case of our government’s relationship with Wall Street and the big banks that line their pockets, get them elected, and ultimately tell them what to do: Take two steps forward, and three steps back.

This ruling could prevent another TARP from hitting the half billion dollar range when the banks invariably send our economy into another recession/depression tailspin, but that doesn’t mean we won’t be bailing them out all over again.

Is it time to end "too big to fail" once and for all? Sound off below!

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