The Fed Makes its Case

Measured as scintillating news, the recent image offensive by Fed Chairman Ben Bernanke and some of his minions falls a bit short. (See Bob Kuttner's post below about a key speech Bernanke made in New York last week, which I also attended) Nonetheless, it is important to the continuing struggle to make certain that the fragile recovery of the world economy from the crisis of 2008 is not recorded as a tantalizing pause on the road to calamity when the history of this era is finally written.

In the throws of the crisis, the Fed acted with both remarkable aggressiveness and disregard for democratic decision making. Considering the threat, it is easy to understand its failure to build a broad consensus for its policies. The Fed used its authority under Section 13(3) of the Federal Reserve Act to lend to “any individual, corporation or partnership,” available only upon a finding of “unusual and exigent circumstances” to loan $85 billion to AIG. The same provision was used to put in place six credit facilities that established a firewall against the spreading meltdown.

In addition, relying on an expansive reading of Section 14 of the Federal Reserve Act, the Fed entered into massive and uncapped currency swaps with central banks around the world to counter the mortal threat to foreign banks that could no longer access US credit markets or currency swap markets for essential U.S. currency to meet their dollar-denominated obligations.