The FED Agreed Not To Allocate Credit

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FED officials in high and powerful positions keep talking about another round of security purchases focused on mortgage-backed securities (MBS). Do they not know that there is a new Federal Reserve-Treasury Accord in place in which the FED agreed “to avoid credit risk and credit allocation.” Specifically, “The Federal Reserve’s lender-of-last-resort responsibilities involve lending against collateral, secured to the satisfaction of the responsible Federal Reserve Bank. Actions taken by the Federal Reserve should also aim to improve financial or credit conditions broadly, not to allocate credit to narrowly-defined sectors or classes of borrowers. Government decisions to influence the allocation of credit are the province of the fiscal authorities.”

I am not alone in pointing out that credit allocation is fiscal policy (for example in mid-2009). Marvin Goodfriend has a lead article in the Journal of Monetary Economics (2011) in which he says the same: “Central bank credit policy works by interposing the government between private borrowers and lenders and exploiting the government’s creditworthiness—the power to borrow credibly against future taxes—to facilitate flows to distressed or favored borrowers. Doing so involves a fiscal policy decision to put taxpayer funds at risk.”

6:25 pm on August 24, 2012