Academics and politicians have praised Ben Bernanke and the Fed for their inventiveness in setting up credit programs during the acute phase of the Great Financial Crisis.  Bernanke and the Fed had to.  Had the banks borrowed at the discount window like they were suppose to it would have revealed just how unhealthy the banks were.  This would have been contradictory to the message Bernanke and the rest of the Committee to Save the Banks was sending about the banks being in good health.

In its hubris, the Fed spills the beans about its efforts to deceive.

To meet demands for term funding more directly, the Federal Reserve established the Term Auction Facility (TAF) in December 2007. Under the program, the Federal Reserve provided term discount window loans to depository institutions in generally sound financial condition. Loans extended under the TAF were fully collateralized by standard discount window collateral. Importantly, the funds were allocated through an auction so borrowers would not face the perceived stigma of going to the discount window to seek a loan.

Notice how the Term Auction Facility was designed to avoid going through the discount window.

Next, notice how the Fed in its role of lender of last resort must and is willing to offer the banks all the term funding they need.  This is important because the entire notion of an auction is a sham!

Traditionally, the rate charged to banks who borrowed at the discount window was 1% more than the current Fed Funds rate.  By holding an “auction”, banks borrowed at a lower rate as the supply of money (the amount of term funding being offered) is at least as great as demand (the amount of funding the banks need).

This wasn’t the only case of the Fed effectively transferring taxpayer money to the banks by charging below market rates.  Mark Pittman and Bloomberg showed the Fed transferred a minimum of $12 billion in taxpayer money to the banks.