Is the Fed Allowed to do This?

Megan McArdle wonders what legal right the Federal Reserve has to go in the insurance business:

It’s probable that they don’t actually have the legal right to do anything like this. Their authority is this: who’s going to stop them? No one wants to take on responsibility for this mess themselves.

Section 13-3 of the Federal Reserve Act gives them the authority. Assuming you read it very broadly:

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.

Glad that’s all clear now.

Posted by on September 17th, 2008 at 12:37 am


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