I’ve been harping on the vacancies on the Federal Reserve Board of Governors for a while now primarily because I think they’re contributing to tight money that’s stifling economic growth. But Economics of Contempt raises a different issue, namely that given the current vacancies it’s actually illegal for the Fed to use its Section 13(3) authority to engage in emergency lending to non-bank entities. The creation of any such facilities requires “the affirmative vote of not less than five members” of the Board of Governors and right now there are only four, plus the three vacancies.
Why does this matter? Well it matters because in the not-so-distant past such emergency lending was used to prevent economy-paralyzing runs in the money market world. Such runs aren’t likely to recur, but as EOC observes one could imagine something like this happening if European sovereign debt problems recur and break a mid-sized European bank or two. I would observe that more generally you never know what’s going to come down the road, and while not every problem should be met with a forceful Fed intervention it would be a disaster for the Fed to not intervene simply because Richard Shelby is being a pain in the ass and won’t bring Obama’s nominees up for a vote.
William Greider’s 1989 book on the Fed is titled Secrets of the Temple: How the Federal Reserve Runs the Country. Whatever you think of the book’s critique, the most important thing it gets right is simply to point out that the Federal Reserve is incredibly important. And yet thought it gets discussed in the business press all the time, Fed issues never make it as a big-time political issue the way Supreme Court nominations do. In this case, both the White House and the congressional leadership seem to me to have fallen into that very trap. But it’s important—very important—that these confirmations get done ASAP.