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On Thursday, the Fed took a dramatic step to try to stabilize the financial system, offering banks trillions of dollars in new short-term loans. The loans would last for up to three months. Banks could only access the money if they turned over super-safe assets—mainly US Treasury bonds—whose value was equal to the loan amount.
The basic idea was as old as central banking itself. In times of financial stress, people want to hold more cash. That puts pressure on banks, who don’t have as much cash as people want, which can lead to a financial panic. To stave off panic, the central bank creates additional cash and lends it to the banks, allowing banks to meet customer demands and stave off a meltdown.
Unfortunately, the large dollar amounts and the convoluted process the Fed uses to distribute the money has led to confusion and misguided criticism. Rep. Alexandria Ocasio-Cortez, for example, griped that the $1.5 trillion the Fed is offering to banks this week could cover “all student loan debt in the US.” A number of people complained that it was a bailout for banks. These folks seem not to know, or care, that the banks will have to pay back ever penny, with interest, within three months. That’s not a ba
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