Bernanke To Cities: Drop Dead


States and municipalities hoping for assistance from the Federal Reserve are out of luck. Ben Bernanke has suddenly discovered that the are limits as to what the Federal Reserve Act allows the Fed to do, and funding cash strapped and debt ridden states and localities lies on the other side of those limits.

“The Federal Reserve Act provides the Federal Reserve with only limited ability to purchase directly the obligations of states and municipalities,” Bernanke wrote in an October 28th letter to Pennsylvania Democratic Congressman Paul Kanjorski. “In addition, the Federal Reserve generally has little or no authority to lend directly to a state or municipal government.”

While we’re glad there are some limits about what the Federal Reserve can do, we can’t help but wonder about this sudden discovery of the limits. The Federal Reserve has engaged in all sorts of activities that have little, if any, legal precedent. A brief list would include that backstop of Bear Stearns assets, the bridge loan extended to AIG, the support of the commercial paper markets and the launching of a discount window for broker-dealer.

Could the discovery of the new limits be related to the fact that Bernanke has reportedly said the Fed does not want any new authority to lend to states or municipalities? It’s hard to avoid the suspicion that Bernanke has concluded that the Fed has exactly as much authority to do what it wants and lacks authority to do what politicians demand. In some sense, it’s relieving to see the Fed fighting to preserve its political independence while preserving local jurisdictions from control by the central bank. But we can squint our eyes a bit and see yet another bureaucrat struggling to preserve the autonomy of his institution from public control.