House bill would limit Fed’s emergency powers

A pair of House lawmakers have joined the bipartisan push to place more limits on how the Federal Reserve can react during a financial crisis.

Reps. Scott Garrett (R-N.J.) and Michael Capuano (D-Mass.) introduced legislation Wednesday that mirrored legislation previously offered by Sens. Elizabeth Warren (D-Mass.) and David Vitter (R-La.).

{mosads}The bills take square aim at the idea that during the 2008 financial collapse, the Fed came to the rescue of the nation’s largest banks, handing them massive amounts in loans at nearly zero interest. Arguing that such a practice gives some banks the unfair advantage of appearing “too big to fail,” and that the central bank has not done enough itself to fix things, lawmakers want to ensure that next time around, the Fed cannot be as selective.

“Amidst the financial crisis of 2008, we witnessed the worst kinds of government cronyism when huge financial institutions were bailed out through section 13(3) of the Federal Reserve Act without much prudence or oversight,” said Garrett.

Capuano said the “unprecedented assistance” offered by the Fed back then helped solidify the impression that the government will rescue massive banks if they face collapse, giving those giants an unfair market advantage.

“While the Dodd-Frank Act brought some reforms, the perception lingers that some financial institutions are simply Too Big to Fail and could be bailed out again,” he said.

Similar to the Senate bill, the House legislation would require the Fed to ensure any emergency lending programs are available to more than just a few banks, or get special congressional approval for a narrower initiative. It would also bar the Fed from lending to insolvent institutions to prop them up, and charge a deliberately high interest rate on those emergency loans that would serve as a penalty.