Mr. Dudley’s concern is about a little-noticed piece of the 2010 Dodd-Frank Act that actually reduced the central bank’s authority in one crucial area: its ability to provide emergency funding to strapped financial firms.
The Fed arrested the 2008 financial crisis by using this authority to create a series of unprecedented programs that offered emergency financing not just to American banks – its traditional flock – but also to foreign banks, and not just to banks but to other kinds of financial companies as well, and indeed to other kinds of companies entirely.
Congress responded to this performance by making it difficult to repeat. Dodd-Frank imposed new restrictions on the Fed’s ability to make emergency loans, or to keep money flowing, outside the banking industry.
One basic reason was that Congress had never really intended to give the Fed such broad power in the first place. Rather remarkably, the authority that the Fed used to save the financial system in 2008 was granted by Congress in 1991 with almost no debate or public notice, a story I first told in The Washington Post in 2009. It was quietly slipped into a broader bill by former Senator Christopher Dodd of Connecticut, at the behest of Wall Street companies including Goldman Sachs. When it was first used almost two decades later, legislators like Representative Barney Frank confessed that they didn’t know they had voted for it.The problem was that Clinton, Rubin, Summers and Democrats like Dodd allowed the rise of an unregulated shadow banking system. Granted they were facing a Republican Congress but Senators like Dodd are creatures of the financial industry, bought and paid for.
(via Thoma)
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