Sue the Fed: The Case for Privately Enforceable Stautory Constraints on Federal Reserve Emergency Lending
The federal government’s economic response to the COVID-19 pandemic has principally been one in which the Federal Reserve has set up extraordinary lending facilities in partnership with the Treasury Department. These facilities were modeled on multitrillion-dollar lending facilities set up by the Federal Reserve in 2008 in response to the prior economic crisis. These Federal Reserve lending facilities are extraordinary in size but also extraordinary because they involve lending to firms that are not banks. Federal Reserve lending over the first hundred years of its history was almost exclusively limited to banks. Congress placed statutory limits on this extraordinary lending authority in the Dodd-Frank Act of 2010 to limit the Federal Reserve’s discretion and minimize the risk that generous lending by the Federal Reserve would encourage excessive risk taking. Those limits prohibit the Fed from supporting insolvent firms, from propping up individual firms like it did with AIG in 2008, and includes a number of other prescriptive measures to ensure the Federal Reserve has reasonable risk management practices even in extraordinary times. This paper argues that those limits have not proven enforceable nor constraining on the Fed’s discretion, and this paper instead argues that a private right of action to enforce them would better fulfill Congress’ objective in the Dodd-Frank Act to limit the Federal Reserve’s discretion in lending to non-banks.
