Some have misunderstood my critique of the Fed’s (and Congress’s) reliance on Treasury funding for 13(3) emergency facilities. My argument isn’t that it’s illegal (unless you take the clearly incorrect view that the Fed must avoid loan-level losses on 13(3)).

Instead, .../1

This is about locking in one kind of institutional arrangement that is not required by (and not prohibited by) the statute. The Fed has made a judgment about institutional arrangements—Treasury first-loss absorber on an SPV that will be the Fed’s counterparty. /2

But this *specific* arrangement is not required by law; there are other ways to design the portfolio to avoid taxpayer losses and identify security that the Fed will pronounce “satisfactory”. /3

The Fed seems to be leaning hard on the idea that this specific structure *is* required by law (it’s not), and that introduces two different kinds of risks: /4

First, it will hamstring the Fed in the future if there is no Treasury financing available because of politics. /5

Second, Treasury is now arguably in a position to keep emergency lending going for non-emergency purposes. We’ve witnessed a Fed-Treasury wedding; the divorce will be non-trivial. /6

I do not criticize the Fed for taking precautions—those precautions are required by law. Indeed, I have a forthcoming @YaleJREG paper with Yair Listokin and Nick Parrillo criticizing the Fed for failing to explain itself even more. /7

But I will keep fighting the idea that central bank creativity is dead because the Federal Reserve Act created the One SPV To Rule Them All. It’s not. It didn’t. There are risks. The Fed is taking them. It should. This isn’t over.

Except for this thread, which is /end