An Old but Powerful Fed Paragraph

When the Federal Reserve Board authorized the Federal Reserve Bank of New York to lend $29 billion to J.P. Morgan Chase in connection with its purchase of Bear Stearns, it invoked a little-used and previously little noticed clause in the Federal Reserve Act: Section 13(3) that begins: “In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may …,” and then there’s a lot of technical language which essentially means that the Federal Reserve can lend money to “any individual, partnership, or corporation,” as long as certain requirements are met. Where did that extraordinary clause come from? The Minneapolis Fed’s “Region” magazine offers a thumbnail history (”The History of a Powerful Paragraph”) at http://www.minneapolisfed.org/pubs/region/08-06/history.cfm and points to a longer version of the story that it published in 2002: http://www.minneapolisfed.org/pubs/region/02-12/lender.cfm
“This isn’t simply a story about extraordinary measures taken long ago that have no meaning for today. Rather, it’s a story about the long-standing debate about the nature and purpose of Federal Reserve banks,” it says. – David Wessel