The Federal Reserve System operating through the Federal Reserve Bank of New York (FRBNY) and the Board of Governors has advanced an enormous amount of credit to the financial system in recent months. As in the early days of the New Deal, some sort of new lending facility is announced virtually every two weeks or so. AIER published a detailed study of similar innovations in Fed lending policy, usually based on equally flimsy statutory authority, during the early 1930s in its Economic Education Bulletin for September 1995.

All the recent lending activity has altered the composition of the Fed’s balance sheet in ways difficult to comprehend even for long-time Fed watchers. Also, much less of that lending is based on clear statutory authority than one might prefer if one cared about the rule of law and the potential for tyrannical government.

The two principal differences in recent Fed lending behavior are the greatly increased use of the discount window (principally at FRBNY) and the offering of System open-market operations (SOMO) financing for defined terms longer than overnight (currently 28 days). Also, the recent creation of Fed lending facilities targeted at securities of lesser quality than full-faith-and-credit (FFC) Treasury securities is unusual in recent decades.

Table 1 below, taken from the FRBNY website and dated March 2008, lists all the various lending facilities that have emerged in recent months. Interestingly, no source of statutory authority is cited for any of them. Two have self-evident sources of authority: “Regular OMOs” are SOMO, and the authority for them is Section 14 (b) of the Federal Reserve Act (the “Act”). The second self-evident authority is for “Discount Window,” the traditional lending operations of the Reserve Banks, and the authority is either Section 10B (1) or the second and eighth paragraphs of Section 13 of the Act (but not both Sections simultaneously).

Table 1: Forms of Fed Lending

One other activity stretches the limits of statutory authority but reasonably might be allowed by inference or implication from SOMO activities under Section 14 (b): “Securities Lending” with the primary dealers. Table 2 below shows that the new forms of credit, such as the loans to the primary dealers and the Term Auction Facility, have reached $117 billion, about 13 percent of the Fed's balance sheet. This share is increasing rapidly. FRBNY has engaged in that activity under arrangements with the primary dealers in U.S. government securities for decades, and those arrangements are the basis of the repurchase agreement or “repo” activity that the Fed has used since the 1960s as its principal instrument for influencing the supply of central bank reserves and short-term interest rates in the money market. Table 3 shows the current list of primary dealers.

None of the other recently announced Fed activities, like the exotically named “Single-Tranche OMO Program” (announced March 7, 2008), can be traced back to the authority of any single statute. Instead, like so much else of the recent announcements, one has to infer the authority from the structure of Federal Reserve Regulation A, whose Section 201.1 (a) ascribes the authority for the regulation to all of the lending sections of the Act (there are eight), without deriving any specific regulatory provision from any specific statutory authority.

The exact nature and magnitude of current Fed lending activities has not been made clear to citizens. There is an inadequate legal basis for most of that lending. Essentially, the public is being presented with a series of faits accomplis and is being dared to challenge those actions. When no effective challenge and, indeed, praise emerges instead, the Fed feels emboldened to take even more innovative actions (even if progressively less well-founded legally). How and when the Fed might be challenged about these loans remains to be seen, but congressional hearings on the Bear Stearns loan on April 3, 2008, might prove a useful beginning.

Notes: Securities held outright are $151.9 billion less than one year earlier. Repurchase agreements are $52.6 billion more than one year earlier. Foreign account holdings increased $304.5 billion during that year, of which $230.6 billion were federal agency securities.

Table 3
List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York, November 30, 2007

BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Bear, Stearns & Co., Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Countrywide Securities Corporation
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Wasserstein Securities LLC.
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Lehman Brothers Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.

Note: This list has been compiled and made available for statistical purposes only and has no significance with respect to other relationships between dealers and the Federal Reserve Bank of New York. Qualification for the reporting list is based on the achievement and maintenance of the standards outlined in the Federal Reserve Bank of New York's memorandum of January 22, 1992.