The Role of Politics in the Federal Reserve's Lending during the Financial Crisis
18 Pages Posted: 17 Jul 2012 Last revised: 19 Oct 2012
Date Written: 2012
In response to the recent US financial crisis, several scholars have investigated whether politics affected the federal government’s “bailout” of the financial industry. These studies have reached divergent conclusions. For example, political contributions and lobbying activities have been linked to participation in the Troubled Assets Relief Program as well as the amount of capital initially received from Treasury. On the other hand, my own earlier research showed that the process through which financial institutions exited TARP was not affected by political variables.
This research project builds on this burgeoning strand of literature by investigating the Federal Reserve’s lending behavior during the financial crisis. As far as I am aware, this is the first investigation of this topic, since data on the Fed’s lending decisions were not fully available to the public until Bloomberg News published it online after a successful Freedom of Information Act lawsuit in December 2011. My empirical analysis finds that more politically active and better-connected financial institutions received more capital and, correspondingly, profited more from borrowing from the Federal Reserve’s lending programs between 2007 and 2010. This conclusion should be concerning to observers of the central bank since it is virtually universally believed that the institution’s mission is undermined if it is influenced by politics.
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