by Dirk Ehnts, Econoblog101
I have lately asked whether the private sector – firms and households – can borrow from the central bank, and the answer was no. I should have made it clear, perhaps, that the “no” is not a “never” but a “no, but”. Since there is not one central bank but many, rules differ. Also, the definition of a financial crisis should be “things are so bad that rules are broken, procedure ignored”. Let's look at one of the instances of financial crisis: the federal reserve Bank in the last financial crisis.
The following discussion is based on the paper “When the Fed Conducts Monetary Credit Policy” by David Price, which was published in 2012 at the Richmond Fed (kudos to Erik Jochem for pointing out that paper). The Fed has “emergency powers”, which have been granted by Congress in 1932 and expanded in 1991, according to the paper. The Fed's timeline mentions banking acts of 1932, and a quick search gave me the Emergency Banking Act from 1933, which contains this clause:
Subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe, any Federal reserve bank may make advances to any individual, partnership, or corporation on the promissory notes of such individual, partnership, or corporation secured by direct obligations of the United States or by any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by any agency of the United States. Such advances shall be made for periods not exceeding 90 days and shall bear interest at rates fixed from time to time by the Federal reserve bank, subject to the review and determination of the Board of Governors of the Federal Reserve System.
Then, there is the 1991 Federal Deposit Insurance Corporation Improvement Act.There are also rumors that the Fed has a book – the doomsday book – which contains information about what it can do when push comes to shove, and what it did in the past. In the last financial crisis, the Fed created some new facilities, like the Term Asset-Backed Securities Loan Facility (TALF). The Fed writes in its FAQ:
