Stephen Foley: If we don't mend our broken telephones, then a lot more kittens will be crushed


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The Independent Online

US Outlook: In the UK it's called Chinese Whispers.

Here in the US, the game is known as Broken Telephone. You all know it. A breathless piece of news, passed on from person to person to person, each time imperfectly heard, eventually becomes so bent out of shape it has been transformed into something ludicrous.

Jon Stewart, America's pre-eminent satirist, got the bent-out-of-shape end of a chain of broken telephone calls that began with a Bloomberg News article last week, assessing some of the details of the Federal Reserve's crisis lending during the market panic of 2008. What he thought he heard got him so angry he crushed a kitten. (Go watch on the web. It's quite funny. It's just a shame it's all horseshit.)

What the audience of The Daily Show with Jon Stewart was told was that the Fed "ultimately sent the banks $7.7 trillion, more than twice the annual budget of the entire federal government, obviously not counting that $7.7 trillion expenditure".

The show was repeating a meme that had already taken hold of the internet, the result of negligent reporting by media organisation after media organisation. Viewers saw clips from CNN (the amount "doled out to US banks: $7.7trn"), MSNBC ("the Fed lent trillions of dollars at 0.01 per cent") and even Bloomberg TV, taken out of context ("kept it secret from the Treasury and from Congress"). None of it is remotely true.

Quickly, for the record. Bloomberg's $7.7trn figure was what it got when it added together all the Fed emergency lending facilities and guarantees to parts of the frozen credit markets, but of course the potential borrowers and market participants never drew on the vast majority of that backstop offer of emergency funds. Even on the worst day of the crisis, in January 2009, the most owed to the Fed was $1.2 trillion, most of it overnight or otherwise very short-term lending, fully collateralised and all of it ultimately paid back with interest for the taxpayer. Nonetheless, the scale of the promises by the Fed needed to match the scale of the panic, else it would have never ended – and if it had never ended, it wouldn't just be protesting students living in tents in public parks right now.

All of the Fed's lending was at what could realistically have been market interest rates, if the markets hadn't stopped working. That lowest-of-the-low rate of 0.01 per cent was available momentarily in December 2008, and let's not forget that short-term Treasury bills even had a negative interest rate at the height of the panic, such was the desperation of banks to own safe assets.

Finally, it was only the detail of which banks tapped the Fed for emergency borrowing that was kept secret, in the knowledge that naming them would stoke the bank runs the Fed was working at all costs to prevent. The size of the borrowing overall was regularly reported to the public, and indeed was a matter of comment in the media at the time. I know. I was there.

The complexity of the modern credit markets and our fury at Wall Street's recklessness have made this subject ripe for Chinese whispers. But no wonder Fed chairman Ben Bernanke went to the extraordinary length this week of releasing a four-page rebuttal of "egregious errors and mistakes" in recent reporting. Such are are the nonsenses on which Republican presidential candidate Rick Perry wants to mete out Texan-style justice to the "traitor" Bernanke, and which stoke rival Ron Paul's retrograde campaign to End the Fed. The liberal Jon Stewart is now on the anti-Fed bandwagon, and even my local Occupy Wall Street protesters carried placards showing Ben Bernanke dressed as Osama bin Laden.

These are worrying times for anyone who thinks we need a robust Fed to nurture our timid economic recovery and to stand ready in case European leaders ignite a new financial panic. Instead of focusing on these tasks, the Fed has to second-guess political, media and public opinion, in a way that will constrain it from vital action in a future crisis.

Ignorance wasn't bliss when nobody paid attention to the credit markets before 2008, and there is no excuse for ignorance now. Everyone in this confounded chain of reporting needs to fix our broken telephones.