People’s Bank Still Owes an Accounting to Its Shareholders: View

Imagine that a friend with infinite resources gives you unlimited access to his bank account in exchange for a symbolic amount of interest, say 0.01 percent. Then imagine that you can do as you please with the money, including lend it back to your deep-pocketed friend at a much higher rate of interest and keep the difference as profit.

It sounds too good to be true, yet it happens to be a pretty good analogy for the method the U.S. Federal Reserve used to rescue the financial system from collapse in 2008. The biggest U.S. banks -- and some foreign ones -- were given access to Fed lending programs at negligible rates and then used the money to, among other things, buy 10-year Treasury securities with yields from 2.05 percent to 4.27 percent. Altogether, the central bank committed $3.5 trillion to bailing out banks and restoring the flow of credit to a paralyzed financial system.