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Fed Proposal to End Bailouts Falls Short

July 25, 2014 in Economics

By Mark A. Calabria, Marcus Stanley

Mark A. Calabria and Marcus Stanley

At the heart of public anger with Wall Street is the sense that accountability is lacking. The largest banks seem to live in a ‘heads I win, tails you lose’ world in which they keep their gains but receive a bailout to prevent their failure.

It is impossible to read the proposal and see how it limits Federal Reserve discretion.”

The most publicized bailout of the financial crisis was the TARP bill that provided capital injections to a wide range of banks. But most of the assistance to financial firms was provided through a less publicized set of emergency lending programs authorized by Section 13(3) of the Federal Reserve Act. This emergency lending authority supported the Fed’s rescue of AIG, a massive set of guarantees for Citibank, which would have failed without them, and an alphabet soup of lending ‘facilities’ that supported a small set of Wall Street dealers with almost unlimited cheap credit for a period of years.

When Congress examined this issue during the Dodd-Frank Act, they placed new limits on emergency lending that are contained in Section 1101 of the legislation. These limits are clearly intended to limit 13-3 lending to programs that are truly broad based (as opposed to bailing out a small set of insider Wall Street institutions), and to exclude the use of the program for ‘bailouts’ of institutions that are actually insolvent.  While Americans for Financial Reform and the Cato Institute disagree on many questions about Dodd-Frank, we do agree these new limitations are important steps forward in improving the accountability of both Wall Street and the Federal Reserve.

We also agree that the Federal Reserve’s implementation of these new limits on emergency lending is totally unsatisfactory and inadequate. Despite a requirement to issue rules detailing the new limits ‘as soon as possible,’ the proposal was released just days before Christmas in 2013, over three years after the passage of Dodd-Frank. The board and staff must have been in a hurry to leave for the holidays, as the notice largely repeats language from the statute and fails to address the law’s intent to limit Federal Reserve discretion. It is impossible to read the proposal and see how it limits Federal Reserve discretion. With the exception of a few actions aimed at single institutions, it appears that the actions taken in 2008, which so angered the public would …read more

Source: OP-EDS

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