From Fire Hose to Garden Hose: Section 13(3) of the Federal Reserve Act

Abstract

At the height of the Great Financial Crisis, the Federal Reserve employed a previously unused section of the Federal Reserve Act, Section 13(3), to engage in a level of lending unparalleled in global financial history. Section 13(3) provided a firehose of liquidity for the US financial system, and The Federal Reserve used it to successfully fight the Great Financial Crisis. However, once the worst of the crisis had passed, Congress quickly acted to limit the Federal Reserve’s powers under Section 13(3) by passing DoddFrank and introducing the orderly liquidation authority.

These limitations have reduced the Federal Reserve’s Section 13(3) power to that of a mere garden hose. One can only speculate whether the Great Financial Crisis would have continued and perhaps permanently crippled the US financial system had the Federal Reserve not been able to effectively utilize Section 13(3). The Federal Reserve’s now-limited Section 13(3) power will undoubtedly hamper its ability to respond to crises in the future.

Keywords: federal reserve act, federal reserve, section 13(3), DoddFrank, financial crisis, Lehman Brothers, OLA

JEL Classification: K00, K19, K30