Hoover-Era Law Was Behind Fed-Treasury Debates
WSJ ECON BLOG
Behind many intense debates between the Federal Reserve and the U.S. Treasury in recent months is a Hoover-era law that gives the Fed authority to lend expansively during a crisis.
Bernanke and PaulsonGetty Images
Treasury Secretary Henry Paulson (left) and Fed Chairman Ben Bernanke testify before the House Financial Services Committee on Sept. 24.
Over the past year, the Fed has leaned heavily on this law, which gives it authority to lend to business or even individuals in "unusual and exigent" circumstances. It was the clause used to justify a $29 billion loan to Bear Stearns Cos. which has since lost value, an $85 billion credit line to American International Group Inc., a new government commercial-paper program and several other steps.
Fed officials have argued to Treasury officials and to critics of its handling of the Lehman Brothers collapse that the law also leaves it constrained in important ways.
The law, a single paragraph dropped into section 13 of the Federal Reserve Act in 1932, allows the Fed to make loans to almost anyone during a crisis as long as they are "secured to the satisfaction" of officials.
During debates about Lehman Brothers, Fed officials felt constrained because of doubts about the value of Lehman's assets that would be used as collateral for a loan. When Treasury officials pushed the Fed to acquire Wall Street's shaky assets more aggressively, Fed officials said they were limited by the law to making loans, and couldn't buy assets. Buying assets, they said, should be for the Treasury and Congress to sort out.
The 13(3) provision, as it is called, was originally tucked into a Depression-era highway construction bill, according to a Federal Reserve Bank of Minneapolis history of the provision. It was used sparingly, even during the Depression, because other provisions were enacted that permitted the government to start commercial lending.
Just 123 loans were made under the unusual and exigent provision over four years in the 1930s by the Federal Reserve, totaling about $1.5 million. At other times, such as after the Sept. 11, 2001 terror attacks, the Fed has declined to use the authority. Fed staff has started studying whether that provision, or other aspects of its charter, should be reconsidered in the aftermath of the crisis. –Jon Hilsenrath |
