WASHINGTON — Federal Reserve Board Gov. Elizabeth Duke defended the central bank's use of its emergency lending powers late Monday, arguing that without them, "we would have had a much, much worse outcome."
"Particularly the events that involve specific institutions came up very quickly and we had to act very quickly," she said in remarks to the Women in Housing and Finance. "It would have been far preferable if some other government agency had the funding and the authority to act. But nobody else did and ... if you look at the outcome after the Lehman Brothers' collapse and you look at what that did, that argues for the importance of being able to use these authorities."
Duke's comments come after Democratic and Republican leaders on Capitol Hill both agreed that scaling back the Fed's authority under section 13-3 of the Federal Reserve Act might be necessary. The Fed has used the power, which gives it authority to lend during an "unusual and exigent circumstance" to "any individual, partnership or corporation," to help JP Morgan Chase & Co. absorb Bear Stearns Cos., rescue American International Group Inc. and establish numerous liquidity facilities.
GOP lawmakers unveiled a plan last week that would bar the Fed from lending to individual institutions. House Financial Services Committee Chairman Barney Frank did not go that far but said the powers should be revisited.
Duke was at the Fed for barely two months when it first rescued AIG using its 13-3 authority last October, a move she said on Monday was "extremely difficult and uncomfortable." But she said the majority of efforts under the emergency power has been targeted to broader markets.
"They've been used to support very specific markets with specific dysfunctions and they've been designed so at the point that the market becomes normal, the usage of these facilities is no longer needed," he said. "If the Federal Reserve doesn't have 13-3 authority, I hope some agency in the federal government has a similar authority and the ability to act quickly."