The Rollout of the Geithner Plan
Lessons from the Great Depression I

Krishna Guha Worries About Governance

I agree with him in the general, but each time a particular case comes along somehow I trust the Federal Reserve and the Treasury more than I trust Congress, and wish them untrammeled discretion:

Governance concerns over clean-up drive: With Barack Obama’s administration constrained by congressional hostility to allocating any more taxpayer funds for financial bail-outs, the Federal Reserve and the Federal Deposit Insurance Corporation are in effect bankrolling the new toxic asset purchase programmes.... [T]he existing Fed and FDIC financing commitments raise serious governance questions. Both have explicit legal mandates to address financial stability and expertise to contribute, but there is no disguising the fact that their biggest advantage is their ability to allocate funds without approval from Congress.

In the case of the FDIC any losses will, in principle, by born by the banking industry itself. Sheila Bair, the FDIC chairman, said the institution would charge up-front fees and, if necessary, institute a special levy. But with the banking industry in a parlous state, the FDIC may have to lean on its credit line with the Treasury, which Congress is considering expanding dramatically. It is possible to imagine scenarios in which the banks were never able to repay the losses collectively, requiring the taxpayer to take the hit.

Meanwhile, while in the first instance the Fed funds its programmes by creating money, many of these operations may ultimately have to be refinanced with government debt.... Fed credit easing also by definition influences the relative allocation of funds to different sectors, even if its purpose is to restore wider financial stability and support the economy...