Economics of Contempt gives a nightmare scenario where another run occurs on the money market fund and:
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)…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.
This leads Yglesias to ask: “Does Senator Shelby even know about this Section 13(3) rule? I doubt it.” Oh he does, and given how much Democrats bent over backwards to appease him on 13(3) in the financial reform bill (without getting his vote) makes his effort to sabotage the Federal Reserve even worse.
Let’s go in the wayback machine. The Federal Reserve bails out AIG using 13(3) under “unusual and exigent circumstances.” Everyone goes nuts. To get a sense of the argument at the time, Eric Posner argued it was illegal, here’s Economics of Contempt arguing it was, correctly, legal. The Federal Reserve goes on to create liquidity facilities for emergency lending among the largest banks.
Reforming the accountability of 13(3) powers is in the original The President’s White Paper on financial reform: “The Federal Reserve’s Section 13(3) authority should be subject to prior written approval of the Secretary of Treasury for lending under Section 13(3) to provide appropriate accountability going forward.” Feeling that this wasn’t good enough, progressives mounted a successful campaign to “Audit the Fed” and their emergency lending powers (see my interview with Dean Baker for more).
Putting much stronger clamps on 13(3) has been a central part of the conservative agenda as well. If you look at the anemic House Republican Financial Reform Bill one of the few things that felt it wasn’t thrown together overnight was a 13(3) section where they call for Congress to be able to overrule the Treasury Secretary’s approval. In general, conservatives really wanted to see 13(3) pulled back, which combines with the new, Ron Paul-influenced Tea Party objective to “End The Fed.”
The Dodd-Shelby Compromise on 13(3)
The extent of 13(3) powers was a major fighting point between Republicans and Democrats in the Senate. Let’s go to the May 5th 2010 “Dodd-Shelby compromise” on resolution authority and 13(3) lending. Shelby says every single thing the Democrats are proposing institutionalizes permanent bailouts. Finally Dodd and him come to a tentative agreement over an amendment and Shelby releases the following statement:
“Fortunately, the Chairman of the Banking Committee, Senator Chris Dodd and I have worked through a number of issues and resolved, to my satisfaction, the concerns that I expressed about government bailouts…In order to achieve this, our amendment:
· eliminates the $50 billion bailout fund;
· significantly tightens up language in the bill dealing with the Fed’s ability to provide liquidity to the financial system in times of severe market distress;
· requires the approval of the Treasury Secretary before the Fed can undertake any emergency lending;
· establishes strict solvency and collateral requirements for any emergency Fed lending; and
· establishes strict accountability standards for any emergency Fed lending.
Liquidity and emergency lending are 13(3). Here’s C-SPAN video of him reading this into the record. This has all been put into the bill through an amendment that received a vote of 93-5.
(I thought that the prefunding was an important idea and its removal was part of Mitch McConnell’s successful plan to bring Wall Street’s donations into the GOP camp. But I largely agree with the other parts of this amendment.)
The Democrats bent over backwards to make sure Shelby’s concerns about 13(3) were addressed. Backwards! And here he is sabotaging the Federal Reserve’s ability to follow through on this anyway. Is the implication that he wants unemployment higher and to trigger another financial panic?
Pattern: The Democrats bend over backwards to make sure Republicans’ worries that reasonable bankruptcy proceedings will be ignored for resolution authority are addressed. So they put in several roadblocks before resolution is invoked: the Treasury Secretary has to ask the Fed Board and then petition a special panel of bankruptcy judges to start resolution. The Republicans vote against it anyway and continue to call it a bailout bill. I’m a little worried that’s too many checks on resolution authority, checks designed to make sure its execution will be botched even when resolution is appropriate.
Pattern: Republicans and their donors worry that the CFPB will hurt safety and soundness. Shelby was big into that as well. So The FSOC is given a veto over the CFPB in case the Bureau goes rogue. Republicans continue to refer to the Bureau as a rogue agency and look to sabotage it anyway.
And here we are. If this makes you as mad as it makes me, it may be time to look to the constitutional option for Senate Reform for the new year and for the Senate and Obama to push to get their FOMC candidates through the Senate.