DIrk Ehnts asks: Can the private sector — firms ahd households, borrow from the central bank? The answer is “no, but…” The definition of a financial crisis should be “things are so bad that rules are broken, procedure ignored”. Let’s look at one of the instances of financial crisis: the Federal Reserve Bank in the last financial crisis.
The Fed has “emergency powers”, which have been granted by Congress in 1932 and expanded in 1991. The Emergency Banking Act of 1933 contains this clause.
Subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe, any Federal reserve bank may make advances to any individual, partnership, or corporation on the promissory notes of such individual, partnership, or corporation secured by direct obligations of the United States or by any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by any agency of the United States. Such advances shall be made for periods not exceeding 90 days and shall bear interest at rates fixed from time to time by the Federal reserve bank, subject to the review and determination of the Board of Governors of the Federal Reserve System.
The Fed has this question in its FAQ section:
What types of investment funds are eligible borrowers?
Investment funds that are organized in the United States and managed by an investment manager that has its principal place of business located in the United States are eligible borrowers for purposes of the TALF. However, any investment fund which is not a U.S. company in accordance with the last sentence of the first FAQ in the “Borrower Eligibility” section is not an eligible borrower for purposes of the TALF.
The Fed also extended credit to rescue Bear Stearns and American Insurance Group (AIG), which was highly controversial when it happened. The Fed was forced to reveal some information about the balance sheet operations. There were also swap programs with five central banks. The Fed writes:
In November 2011, the Federal Reserve announced that it had authorized temporary foreign-currency liquidity swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. These arrangements were established to provide the Federal Reserve with the capacity to offer liquidity to U.S. institutions in currencies of the counterparty central banks (that is, in Canadian dollars, sterling, yen, euros, and Swiss francs). The Federal Reserve lines constitute a part of a network of bilateral swap lines among the six central banks, which allow for the provision of liquidity in each jurisdiction in any of the six currencies should central banks judge that market conditions warrant. In October 2013, the Federal Reserve and these central banks announced that their liquidity swap arrangements would be converted to standing arrangements that will remain in place until further notice. Since their initial establishment in 2009, the Federal Reserve has not drawn on any of the foreign-currency liquidity swap lines.
In the longer term and as its authorities permit, the Treasury will seek to remove from the Federal Reserve’s balance sheet, or to liquidate, the so-called Maiden Lane facilities made by the Federal Reserve as part of efforts to stabilize systemically critical financial institutions.
By now, all the Maiden Lane facilities have been resolved. What has not been resolved is the role of Central Banks in financial crises. In the US, the Fed has come out smelling quite good. Whether or not recorvery will trickle down to the middle and low class remains to be seen.
