New N.Y. Fed Chief Endorses Debt Power
American Banker | Monday, March 9, 2009
By Steven Sloan
In his first major public appearance since becoming the Federal Reserve Bank of New York's president and chief executive, William Dudley threw his support Friday behind a dramatic idea: letting the central bank issue its own debt.
On its face, the idea, which would require congressional approval, would give the Fed a chance to revive lending without simply dumping trillions of dollars into the economy. But Dudley suggested a separate benefit — keeping the Fed independent from the White House.
Selling "Fed bills has more of an optical advantage, because it has more of a separation from the Treasury," he said in an appearance before the Council on Foreign Relations in New York. "The Fed could conduct its policy, issue its bills and not rely on the Treasury."
Dudley also said policymakers have not ruled out creating a "bad bank" for toxic assets, offered reassurance about the size and quality of the Fed's balance sheet, and added his voice to the chorus seeking a systemic risk regulator.
..snip..
Instead of selling its own debt, the Fed could take more money from the Treasury Department. Dudley did not specifically reject this idea and a "supplemental financing account" established in September to lend to the Fed held nearly $200 billion as of March 4.
But that might not make enough of a difference, since the Treasury is nearing the congressionally mandated debt ceiling. Congress could always raise the ceiling, but that would only further tie the central bank to the White House.
Sensitivity to the Fed's independence is running high after criticism that the Obama administration essentially co-opted the Term Asset-Backed Securities Loan Facility. The prospect of making the Fed a systemic risk regulator has only deepened those anxieties...cont'd
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