Private Label Paper and Modern Central Banking
In its continued efforts to bailout the banking industry and stay the continuing credit collapse the Federal Reserve Bank has exercised Section 13, Rule 3 of the Federal Reserve Act of 1913 to support the Central Bank’s financial backstopping of JP Morgan Chase’s acquisition of battered investment bank Bear Stearns whose sudden collapse has sent warning sirens to central bankers and politicians eager to appease their constituency.
Federal Reserve Act of 1913
Enacted in 1913, the Federal Reserve Act constitutes the Federal Reserve’s existence and defines the frame work of a central banking system. To justify opening the Central Bank’s book of treasury securities to Investment Banks in a effort to ease liquidity, The Fed is exercising Section 13 Part 3 which defines the Fed’s open market conduct with “Individuals, Partnerships, and Corporations”.
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.]
This effectively says that the Fed, when times are “requiring immediate action or aid; urgent; pressing” or “requiring a great deal, or more than is reasonable”, the Fed can act as the lender of last resort to anyone, including but limited to “Individuals, Partnerships, and Corporations”.
Tags: Bailout, Bear Stearns, FOMC, JP Morgan
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