Federal Reserve Board chairman Ben Bernanke is suggesting that state
and local governments facing fiscal difficulties seek grants, loans, or
guarantees from the Treasury, while a Treasury official contends they
should ask the Fed about participating in its commercial paper
purchasing program.
Fed, Treasury Point Fingers At Each Other
By Lynn Hume
11 December 2008
Federal Reserve Board chairman Ben Bernanke is suggesting that state
and local governments facing fiscal difficulties seek grants, loans, or
guarantees from the Treasury, while a Treasury official contends they
should ask the Fed about participating in its commercial paper
purchasing program.
Neither of the officials believe their own agencies can offer any
assistance to state and local governments, according to separate
letters they sent earlier to Rep. Paul Kanjorski, D-Pa.,
chairman of the House Financial Services capital markets subcommittee.
The letters were not publicly released until yesterday, when the
congressman disclosed them.
Kanjorski wrote the agencies in October urging them to
provide help to state and local governments, which have had trouble
accessing the short-term market, borrowing money for read-to-go
projects, and meeting their budget needs because of plummeting tax
revenues.
Bernanke responded on Oct. 28, saying the Fed "has little or no
authority to lend directly to a state or municipal government" and does
not plan on seeking any such authority from Congress.
"The Federal Reserve Act provides the Federal Reserve with only
limited ability to purchase directly the obligations of states and
municipalities," he said.
"The Congress wisely established these limitations to support
fundamental principles such as independence of the central bank and a
strong federal system of government in which states and municipalities
have powers and responsibilities that are not subject to review or
oversight at the national level," Bernanke told the lawmaker. "We
believe that it is important to preserve these basic principles and, as
a result, we would not seek any new statutory authorities at this time."
Bernanke said, however, that state and local government officials
"may wish to discuss directly with the administration and the Congress
the potential for direct aid from the U.S. Treasury, perhaps in the
form of grants, loans, or guarantees."
"Because decisions regarding the possible allocation of federal
funds to state and municipal governments are inherently political,
these matters should be discussed and ultimately determined by elected
officials rather than appointed officials such as those at the Federal
Reserve," he said.
But in a Nov. 10 letter to Kanjorski, Kevin Fromer, Treasury
assistant secretary for legislative affairs, said: "We are sensitive to
the financial troubles facing municipalities as a result of strained
credit conditions .... However, we believe that the most effective
solution for these municipalities is a stable financial environment,
and we believe that [the Emergency Economic Stabilization Act] is
sufficient to provide that."
The act authorizes the Treasury to spend up to $700 billion to
purchase the distressed assets - especially mortgage-based securities -
of banks and other financial institutions. But Treasury officials have
repeatedly told reporters during press conferences that the Troubled
Asset Relief Program they set up under the act does not include state
and local governments or tax-exempt securities.
"Your specific suggestions about the use of the Commercial Paper
Funding Facility are best directed to the Federal Reserve, who is
responsible for its operation," Fromer told Kanjorski.
A spokesman for Kanjorski said yesterday that the congressman has no response to the Bernanke and Fromer letters at this time.
|