Timmy Takes on the Fed's Massive Monetary Fire Hose

the warning signs are there
now if only they'll pay attention...

What happened, Timmy? I thought you and the Fed were cuddly and cozy, is this move because they wouldn't show you their diabolical schemes? Terrible.


Geithner said a bill by the Financial Services Committee's chairman, Representative Barney Frank, meets the tests for key elements of a resolution authority that the Obama administration would like to see passed.

It is a "comprehensive coordinated answer to the moral hazard problem" and does not provide any implicit guarantees for financial institutions, he said.

"We cannot put taxpayers in the position of paying for the losses of large private financial institutions," Geithner said. "We must build a system in which individual firms, no matter how large or important, can fail without risking catastrophic damage to the economy."

Geithner said large failing firms should be put into a receivership managed by the Federal Deposit Insurance Corp that would seek to "unwind, dismantle, sell or liquidate the firm in an orderly way" where losses would be borne by shareholders and creditors of the firms.

Enough of that moron, what's Daniel "The Bruiser" Tarullo say about all of this?

Tarullo would like some oversight with his oversight. Sounds dangerous:

For purposes of both effectiveness and accountability, the consolidated supervision of an individual firm, whether or not it is systemically important, is best vested with a single agency. However, the broader task of monitoring and identifying systemic risks that might arise from the interaction of different types of financial institutions and markets--both regulated and unregulated--may exceed the capacity of any individual supervisor. Instead, we should seek to marshal the collective expertise and information of all financial supervisors to identify and respond to developments that threaten the stability of the system as a whole.

So Geithner says take away the Fed's precious 13(3) that extends it the power to call a State of Economic Emergency and pull out the monetary fire hose as it sees fit and Tarullo says let's just regulate everything and then regulate the regulation too?

Just in case you need a quick primer on the Fed's magic hose, Market Oracle provides one:

Section 13(3) Explored

Inquiring minds not satisfied with the above press release are looking into Section 13. Powers of Federal Reserve Banks

3. Discounts for Individuals, Partnerships, and Corporations

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.

[12 USC 343. As added by act of July 21, 1932 (47 Stat. 715); and amended by acts of Aug. 23, 1935 (49 Stat. 714) and Dec. 19, 1991 (105 Stat. 2386.]

Two positions on the board are vacant. It's too bad another one isn't. Although I strongly question the actual intention of section 13(3), a literal interpretation allows the Fed to lend to insurance companies, pizza parlors, casinos, houses of ill repute, or to anyone else the Fed damn well pleases as long as it can muster five votes. Was this really the intent of the bill?

I argue here that Geithner's comments, in fact, mention nothing about this Federal Reserve power. "Any firm that puts itself in a position where it cannot survive without special assistance from the government must face the consequences of failure. The proposed resolution authority would not authorize the government to provide open-bank assistance to any failing firm."

Where in that does it mention the Fed? Surely Geithner's speechwriters know how to choose words carefully. AIG wasn't assistance from the government, it was assistance from the Zimbabwe Ben's PPOTUS and technically we're only borrowing that press (plus interest).

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.