I just finished reading a new Mercatus Center study by Benjamin M. Blau, “Central Bank Intervention and the Role of Political Connections.”
The findings are summarized:
The study uses data from a full-scale audit of the Fed conducted by the General Accounting Office to examine whether banks with political connections were more likely to receive emergency loans during the financial crisis. The Fed is politically independent, and its decision making, including its loans, should be motivated by the best interest of the credit markets and the economy in general. Nonetheless, this study finds a high degree of correlation between political connections and the likelihood of a bank receiving emergency support from the Fed during the financial crisis.
- Banks receiving emergency loans spent 72 times more on lobbying expenditures in the decade before the crisis than banks that did not receive loans; 15 percent of firms receiving support from the Fed employed politically connected individuals; for banks that did not get a loan from the Fed, only 1.5 percent had a well-connected employee.
- Banks that lobbied the Fed or employed politically connected individuals were more likely to receive emergency loans. The study still finds a relationship between political connections and the likelihood of receiving an emergency loan from the Fed even after controlling for bank size and eliminating from the sample firms listed as “too big to fail” by the Financial Stability Board.
- When controlling for factors like size and designation as “too big to fail,” politically active firms on average received larger loans than banks without political connections.
- Banks that employed politically connected individuals were generally in debt to the Fed for longer than those that did not have such employees
Explaining why politically connected banks were more likely to receive emergency assistance will