The Hamstrung Fed
This morning, a little, wonky blog post is creating a lot of controversy. Economics of Contempt writes:
Here’s a scary thought: Let’s say the European sovereign debt crisis flares up again, and one or two Euro banks fail. (Not a bank like UBS or Deutsche Bank, but a medium-sized bank like Bank of Greece or a Landesbank.) That, in turn, causes a U.S. money market fund — many of which have large exposures to Euro banks — to “break the buck,” which leads to another run on money market funds.
The Fed would be powerless to help. The Fed’s emergency lending authority (the famed Section 13(3)) requires that any emergency lending facility to non-banks be approved “by the affirmative vote of not less than five members” of the Fed Board of Governors. Currently, there are only four members of the Fed board: Bernanke, Warsh, Elizabeth Duke, and Dan Tarullo. Donald Kohn retired earlier this month, and the Senate has yet to vote on Obama’s three nominees (Janet Yellen, Peter Diamond, and Sarah Bloom Raskin).
While I don’t expect this scenario to happen, it’s certainly not out of the realm of possibility. And if it did happen, the Fed would have to sit on the sidelines and watch the carnage unfold.
I understand that Senate floor time is scarce (really, I do), but this absolutely has to be at the top of the list. Yes, I know it would be time-consuming to overcome Sen. Shelby’s opposition, but you know what? Screw Shelby. This has to get done, and soon.
Let’s translate a bit. The worst of the financial crisis — not the whole recession, including housing and jobs and businesses and investment, just the part of the recession that really mucked up the United States’ big banks — hit in the fall of 2008. Lending markets seized. That did not just mean that banks could not give loans to homeowners or companies. It meant that banks had trouble loaning cash to one another.
The Federal Reserve recognized the credit crunch as a catastrophe, and immediately took extraordinary measures to prevent the equivalent of an old-fashioned bank run in the invisible interbank lending market. Out of thin air, the Fed created programs like the Term Asset Loan Facility, a $1 trillion fund to secure the asset-backed securitization market — a major source of financing for banks and other companies. The alphabet soup of emergency Fed programs, including TALF, helped to thaw credit markets and stabilize the banking system.
But, Economics of Contempt notes, due to the opposition of one senator — Richard Shelby (R-Ala.) — the Fed does not have enough seated members on its board to create such programs in a crisis. And Congress does not have the wherewithal or speed to create them itself. Granted, there’s no emergency on the horizon. But, given that the United States is suffering from, oh, possible disinflation, mass long-term unemployment and record high debts, now is hardly the time to short-staff the central bank.
At The New York Times, Sewell Chan has more details on the problem of vacancies in important economic positions.