Thursday, January 8, 2009

The Treasury Stretch

In response to the current financial crisis, the Treasury and the Fed have been creative in using their legal authorities. In a previous post, I discussed the Treasury's issuance of Treasury bills to help the Federal Reserve out, not because it needed the additional money.

Treasury announced this program on September 17, stating that it "will provide cash for use in the Federal Reserve initiatives." On the same day, the Federal Reserve Bank of New York was more upfront about the purpose of the program, stating that the funds raised and deposited in a supplementary financing account "serve to drain reserves from the banking system, and will therefore offset the reserve impact of recent Federal Reserve lending and liquidity initiatives."

This has been no small program. On November 12, the amount in the supplementary financing account totalled about $559 billion, which appears to be about the peak amount. The Treasury issued a press release on November 17 that said: "The balance in the Treasury's Supplementary Financing Account will decrease in the coming weeks as outstanding supplementary financing program bills mature. This action is being taken to preserve flexibility in the conduct of debt management policy in meeting the government's financing needs." The amount in the supplementary account at the end of last year had decreased by $300 billion to about $259 billion.

The Treasury's undertaking this program to help out the Fed in an extraordinary situation seems reasonable, though, as I remarked in my previous post on this topic, it has implications for the responsibility for monetary policy if it becomes a habit. I am, however, disappointed that the Treasury obfuscated what the real purpose was and was glad to see that the FRBNY described what was happening accurately.

But there is another issue. To my knowledge, the Treasury has not provided any legal rationale for its authority to undertake this operation. The relevant portion of Chapter 31 of Title 31 of the U.S. Code granting the Secretary of the Treasury the authority to issue Treasury bills reads as follows:

"(a) The Secretary of the Treasury may borrow on the credit of the United States Government amounts necessary for expenditures authorized by law and may buy, redeem, and make refunds under section 3111 of this title. For amounts borrowed, the Secretary may issue—

(1) certificates of indebtedness of the Government; and

Treasury bills of the Government."

Exactly how the Treasury interpreted this language or any other laws to provide the authority to issue T-bills in order to help the Fed is unclear.

For now, this probably does not matter in a practical sense, because Treasury will not likely be challenged on this.

The issue of legal authority has also come up in the use of the TARP funds to help out GM and Chrysler. That has received more attention than the admittedly arcane subject of this post. The legal issues in the auto company bailout are likely to continue to be raised in a political context.

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