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U.S. Rep. Dennis Kucinich wants to put people back to work, but since the private sector has not had much success, he wants to prime the economic pump by spending public money on roads, bridges and other infrastructure projects.
There’s plenty of demand out there, Kucinich told Fox News’ Neil Cavuto on Sept. 7, pointing to an American Society of Civil Engineers report identifying an immense need for infrastructure repairs and rebuilding.
But where would the money come from? States and local governments don’t have those kinds of dollars, Kucinich rightly pointed out. But, the Ohio Democrat added, the federal government does.
"We just found out the other day that the Fed created $1.2 trillion out of nothing, gave it to banks, and some of them foreign banks, so that they could stabilize their operations," he told Cavuto.
That got PolitiFact Ohio’s attention. After all, how can anybody simply create $1.2 trillion out of nothing?
Well, it turns out Kucinich was pretty much on the money, no pun intended.
Let’s take the first part of his sentence, that the Fed created $1.2 trillion out of nothing.
The "Fed" in this case is the Federal Reserve, our country’s central bank. It’s the job of the Fed to use monetary policy to keep inflation in check and to stimulate the economy to create jobs. It does this by buying and selling government-backed securities that either increase or decrease the amount of money in circulation.
The Federal Reserve also serves as the lender of last resort to its member banks who are having liquidity problems and can’t go to other banks for short-term loans.
With that in mind, let’s go back to 2008 and 2009 when the United States banking system was on the brink of disaster. Then-President George W. Bush created the Troubled Asset Relief Program, TARP, to buy up banks’ bad investments and later to infuse the institutions with badly needed capital. In Cleveland, PNC National Bank used TARP money to buy troubled National City.
TARP, however, is not what Kucinich was talking about. TARP was orchestrated by the U.S. Treasury and used money borrowed from the sale of U.S. securities such as Treasury bills.
Nor was he talking about the $800 billion stimulus package of 2009, much of which was in the form of tax cuts.
Kucinich was talking about $1.2 trillion that the Federal Reserve had on loan, primarily to banks, at the peak of its emergency lending during the financial crisis. The figure comes from a Bloomberg News investigative story this past summer that analyzed detailed loan information released by the Federal Reserve.
Indeed, many banks did get money. Morgan Stanley at $107.3 billion received the most, followed by Citigroup at $99.5 billion and Bank of America at $91.4 billion.
The loans, however, were not handed out the way your bank down the street dispenses money, explained Walker Todd, former assistant general counsel to the Federal Reserve banks in Cleveland and New York City.
Regular banks are limited in how much they can loan based on their access to money, be it deposits or other forms of financing. "But the Fed, uniquely among institutions in our society, gets to create money out of thin air," Todd said.
It does so by simply increasing the balance in a member bank’s account. No actual money is printed. It just shows up in the electronic ledger, new money that never existed before that’s now in circulation, boosting the aggregate money supply.
Each bank, however, did have to put up assets as collateral in case the money wasn’t repaid. Some of those assets, according to Bloomberg, were junk bonds.
Eventually, all the money was repaid, with interest. But according to Todd, rather than wipe the money off its books, the Federal Reserve chose to use much of it to further stimulate the economy by purchasing Fannie Mae and Freddie Mac mortgage-backed securities on the open market. So that money remained in circulation.
Finally, what about Kucinich’s claim that some of the $1.2 trillion went to foreign banks? Again, Kucinich was correct. Two of the several foreign banks getting help were Royal Bank of Scotland Plc at $84.5 billion and UBS AG of Switzerland at $77.2 billion. The Federal Reserve treats foreign banks operating in the United States the same as U.S. banks because they are all part of the same financial system.
On a side note, even some companies, including General Electric, received emergency cash.
So while Kucinich’s comment that "the Fed created $1.2 trillion out of nothing, gave it to banks and some of them foreign banks so that they could stabilize their operations" is a bit flip, maybe even pejorative, he was essentially correct in describing the unique money-creating capabilities of the Federal Reserve and how it was used.
On the Truth-O-Meter, his statement rates True.
Interviews with Walker Todd, former assistant general counsel with Federal Reserve banks in Cleveland and New York and now a research fellow with the American Institute for Economic Research in Great Barrington, Mass., Sept. 20 and 22, 2011
Interview and e-mail exchanges with Richard Dekaser, former National City chief economist now with the Parthenon Group in Boston
Interviews and e-mail exchanges with Nathan White, spokesman for U.S. Rep. Dennis Kucinich
Rep. Dennis Kucinich, news release "Kucinich proposes landmark jobs plan," Sept. 21, 2011
Bloomberg News, "Wall Street Aristocracy got $1.2 trillion in Secret Loans," Aug. 22, 2011
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