Unappropriated Dollars: The Fed's Ad Hoc Lending Facilities and the Rules That Govern Them

In response to the spread of COVID-19, the Federal Reserve has established fourteen ad hoc facilities to lend to financial firms, foreign central banks, nonfinancial businesses, and state and local governments. This Article reviews these facilities, explains what they are for, and examines the statutory rules that govern them. It distinguishes between seven liquidity facilities designed to backstop deposit substitutes issued by shadow banks and seven credit facilities designed to invest directly in the real economy. Ten of these facilities – three of the liquidity facilities and all seven of the credit facilities – are contemplated by the CARES Act, which appropriates money for the Treasury Secretary to invest in them. But all ten are inconsistent with at least one of the following three provisions of existing law, none of which the CARES Act explicitly amends: (1) section 13(3)(B)(i) of the Federal Reserve Act, which requires the Fed to ensure that 13(3) lending is “for the purpose of providing liquidity to the financial system”; (2) section 13(3)(A), which requires the Fed to “obtain evidence” that participants are “unable to secure adequate credit accommodations” from other banks; and (3) section 10(a) of the Gold Reserve Act, codified at 31 U.S.C. § 5302, which limits the Treasury Secretary to using the Exchange Stabilization Fund to “deal” in “securities” consistent with “a stable system of exchange rates.” Of the four liquidity facilities not contemplated by the CARES Act, two are inconsistent with any reasonable interpretation of section 14(2)(b) of the Federal Reserve Act, which authorizes the Fed to buy and sell government debt only “in the open market,” and one is inconsistent with a similar requirement in section 14(1) regarding foreign currency. (Although these facilities are permitted by sections 13(13) and 13(3) respectively.) Hence thirteen of the Fed’s fourteen facilities as currently constituted are in tension with either the Federal Reserve Act, the Gold Reserve Act, or both. Three conclusions follow. First, most of the Fed’s current, critical lending activities are an exception to the baseline statutory framework, permissible only in conjunction with the CARES Act. Second, Congress’s failure to amend that framework is obscuring the fact that it is asking the Fed to take on substantial new responsibilities – ones for which it was not designed and which it may struggle to discharge. Third, Congress should update our money and banking laws to clarify the rules governing Fed lending, reduce the need for monetary backstops, and improve the government’s ability to respond quickly and effectively to fiscal emergencies in the future.