The Fed’s Crisis Lending: A Billion Here, a Thousand There

During the economic crisis of 2008, the Federal Reserve loaned billions of dollars to various banks and lenders in order to keep them afloat. One such lender was Eudora Bank in Eudora, Arkansas that received $400,000 during this time period. While the Fed was concentrating its efforts to bail out the big banking corporations, some central banks were making similar loans to smaller banks in communities in their counties. Not all banks required such a bail out. Some smaller banks, such as Howard Bank near Baltimore borrowed as little as a thousand dollars just as a safety net in case the crisis got worse. One big problem during this crisis was that some of the banks that received the Fed’s loans went bankrupt anyways. One such example of this was a small bank in Southern California that failed even after receiving a six million dollar loan from the Fed. Recently, the Fed and central banks released, to the public, a complete list of banks that borrowed from the Fed using its discount rate loans, the oldest emergency loaning program for banks.

The discount rate, for the most part, served the big banking corporations such as Bank of America and Citigroup, but during this crisis the discount rate loans were also open to smaller banks, which usually have to rely on other banks and the central banks for loans. Other emergency services were created to deal with the situation, but they only helped bail out banks in the state of New York. Due to the outrageous amount of banks that lined up for a bail out, the Fed set up an order in which the banks received their loans. One day, October 29 2008, the Fed gave sixty banks loans that ranged from $1,000 to $66.5 billion, of which at least ten went bankrupt. These numbers are unnaturally high since the weekly average of loans the Fed gave out between 2003 and 2006 was less than $50,000. Also, having to borrow from the Fed is usually considered a sign of weakness in a bank.

This article shows how the Federal Reserve runs. It also shows how it handles national crisis and tries its best to keep the entire banking system working the way it should. More than likely the Fed lowered its discount rate during these times to try to increase borrowing and expand the money supply any the economy.

http://www.nytimes.com/2011/04/01/business/economy/01fed.html?_r=1&ref=business