Patrick McHenryChairman

Washington, May 26, 2015 -

May 25, 2015
LINK TO STORY

The Federal Reserve Bank of Richmond has again done the public service of toting up all the implied and explicit government guarantees backing the U.S. financial system. Are you sitting down?

Richmond Fed researchers find that as of the end of 2013 taxpayers were standing behind nearly $26 trillion of financial liabilities. The eye-watering sum represents 60% of the financial industry’s $43 trillion in total liabilities. The Richmond Fed calls this measure of the federal safety net its “Bailout Barometer.” Even more striking is that the amount has hardly changed since 2009, when the government was still employing allegedly temporary rescue programs.

The Dodd-Frank Act was then sold as a way to prevent such bank rescues. “There will be no more tax-funded bailouts—period,” said President Obama as he signed it on July 21, 2010. Five years later the Richmond Fed’s research suggests that he should have said, “If you like your taxpayer safety net, you can keep it.”

This gargantuan safety net hasn’t always been part of the Beltway furniture. As recently as 1999, the first year for which the Richmond Fed calculated its Bailout Barometer, taxpayers stood behind less than 45% of financial liabilities. That’s still way too high for a vibrant market that allows success and failure, but it’s libertarian heaven compared to the Dodd-Frank era. It shows that relatively recently the economy was thriving with much less federal support and could do so again.

As for the status quo, Richmond Fed researchers count almost $15 trillion in explicitly guaranteed liabilities. More than $5 trillion comes from government mortgage monsters Fannie Mae and Freddie Mac. More than $6 trillion comes from bank deposit accounts, which are covered up to $250,000 by the Federal Deposit Insurance Corporation. Taxpayers also stand behind nearly $3 trillion at the Pension Benefit Guaranty Corporation. Throw in an implied trillion at the government-sponsored Farm Credit System and Federal Home Loan Banks.

Studying the lessons of the last crisis and recent claims of regulators, the Richmond team also counts all of the liabilities of the nation’s four largest banks— J.P. Morgan Chase, Bank of America, Citigroup and Wells Fargo. Does anyone believe regulators would let these giants fail?

Also included are the uninsured domestic deposits and short-term liabilities of all banks with more than $50 billion in assets, which Dodd-Frank considers systemically important. The Richmond researchers note that the law’s resolution provisions for large banks “permit the FDIC to pay some creditors more than bankruptcy might allow” and that the FDIC’s implementing rule “suggests that this treatment could apply to short-term creditors.” Implied bank guarantees add up to more than $7 trillion.

The researchers also count $2.7 trillion of money-market mutual funds, given that such funds were rescued in 2008. But they emphasize that their barometer measures 2013 and that the Securities and Exchange Commission has since enacted reforms that “may minimize the danger of runs” on some money funds and “therefore the market’s perception of federal government protection.” Ah, progress.

Some might say the obligations don’t matter because the government could never, and thus would never, meet them. That’s true in sum but even in chunks the bailout burden would be severe. The Richmond measure shows how far we’ve moved from a private financial system.