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Transcript: former Fed General Counsel Scott Alvarez
Scott and I covered a lot of ground on Fed emergency authorities and interventions
ICYMI on Twitter, I recently sat down with Scott Alvarez, general counsel of the Fed from 2004 to 2017. And the transcript is now out. We get into the weeds of Fed authorities/limits under Section 13(3) and Regulation A. We talk about the operationalizing of emergency liquidity facilities and the benefits of SPVs. (And I asked him for his best guess on why the myth has grown that the Fed is legally required to use an SPV when it’s buying risk assets; for quick background, an old 10-tweet thread here debunks the common misconception.) And of course, we talk some Fed history—of the GFC, and all the way back to the Federal Reserve Act. Among other things!
You may have seen a teaser in yesterday’s Morning Money, in which Politico’s Victoria Guida highlights a bit where Scott firmly asserts that the Fed can’t buy stocks under Section 13(3). It’s a pretty straightforward (unimpeachable?) read: under the law, the Fed may only discount “notes, drafts, and bills of exchange.”
Interestingly, Victoria had asked Fed Chair Powell during the July 2020 Fed press conference if the Fed could buy stocks, and he wasn’t so resolute.
He meandered a bit at first, and offered: You know, we haven’t looked and said—tried to say, “What can we buy?” and, you know, “Let’s make a complete list.”
Victoria follows up: “So is it—is it generally supposed to be primarily directed at debt instruments, since you talked about borrowers?”
Powell: The statute doesn’t say that, but, yeah, you could read the statute that way if you want. Honestly, we haven’t tried to push it to, you know, what’s the theoretical limit of it. …
Maybe Powell straight up didn’t know. Maybe he didn’t want a headline of “Fed’s Emergency Authorities Have Hit Their Limit” in July 2020. And, even if that concern was in play, it makes sense to avoid overcorrecting in the other direction and a) saying you could do something you can’t, and b) bearing the potentially unnecessary moral hazard costs of saying, “yeah, the Fed could find a way to directly bid up equities.”
Anyways, I won’t say anything more on the interview here. The full transcript, in which we speak freely and dive deep, is available here. For a shorter read that hits at least some of the highlights, I did a more bite-size summary note of the conversation for the Journal of Financial Crises, available here.
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