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On the day before Thanksgiving in 1991, the U.S. Senate voted to vastly expand the emergency powers of the Federal Reserve.
Almost no one noticed.
The critical language was contained in a single, somewhat inscrutable sentence, and the only public explanation was offered during a final debate that began with a reminder that senators had airplanes to catch. Yet, in removing a long-standing prohibition on loans that supported financial speculation, the provision effectively allowed the Fed for the first time to lend money to Wall Street during a crisis.
That authority, which sat unused for more than 16 years, now provides the legal basis for the Fed’s unprecedented efforts to rescue the financial system.
Since March 2008, the central bank’s board of governors has invoked its emergency powers at least 19 times: to contain the wreckage of Bear Stearns and ease the fall of American International Group, to preserve Goldman Sachs and Morgan Stanley, to limit losses at Bank of America and Citigroup, to lend more than $1 trillion.
The repeated use of the once-dusty law has surprised and alarmed a wide range of people, including economists and members of Congress. It has even raised worries among presidents of the regional banks that make up the Federal Reserve system.
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Many critics are concerned that an institution not accountable to voters is risking vast amounts of public money and choosing which companies get help. Others are concerned that the Fed’s new role will interfere with its basic responsibility for regulating economic growth.
There is also a question about the roots of the crisis: Did investment banks take greater risks in the past two decades because they knew the Fed could rescue them?
