Lev Menand on the Fed's Lending Facilities and the Legal Concerns Surrounding Them

Episode Summary

Executive Summary: Lev Menand argues that the Fed’s crisis-era interventions fit into two buckets: liquidity backstops for shadow banking and credit allocation to the real economy. He says the first is an expanded lender-of-last-resort role, while the second is closer to industrial policy and stretches the Federal Reserve Act, especially Section 13.3 and the Exchange Stabilization Fund, calling for major statutory reform.

Main Topics: Lev Menand’s background and research focus (Priority: 4/5): Menand explains how work on bank stress testing at the New York Fed and on FSOC led him to focus on financial stability, monetary architecture, and the legal structure of money creation. Fed accounts as a public payment option (Priority: 3/5): He and coauthors propose allowing people to hold accounts directly at the Fed, expanding access to sovereign, non-defaultable money beyond cash and reserve-holding institutions. Liquidity facilities as shadow-bank discount windows (Priority: 5/5): The transcript frames programs like repos, commercial paper support, money market fund support, swap lines, and FEMA repo as ad hoc tools to prevent runs on deposit substitutes and preserve par convertibility. Credit facilities as real-economy intervention (Priority: 5/5): Facilities such as Main Street, the corporate credit facilities, municipal lending, and PPP support are described as direct credit allocation to households, firms, and governments rather than traditional central banking. Legal stretching under Section 13.3 and the ESF (Priority: 5/5): Menand argues CARES Act workarounds effectively redefined 'liquidity to the financial system' and used the Exchange Stabilization Fund in ways not plainly authorized by background law. Section 14 and open-market lending (Priority: 4/5): He contends the Fed has long used Section 14 repo and swap operations as a de facto lending authority despite textual tension with the 'open market' requirement. Policy reform and institutional redesign (Priority: 5/5): Menand urges Congress to clarify Fed powers, create a proper emergency investment fund, and rethink regulation of shadow banking so the Fed is not forced to improvise ad hoc facilities.

Key Arguments: The modern monetary system is no longer dominated only by bank deposits; shadow-banking instruments like repo, commercial paper, and money market fund shares are important money-like liabilities that can run and destabilize the economy. Liquidity facilities are best understood as ersatz discount windows for nonbanks, designed to keep broad money instruments trading at par with cash and prevent collapses in monetary aggregates. Credit facilities are different: they allocate credit directly to sectors of the real economy, making the Fed act more like a state bank or industrial policy institution than a neutral central bank. Section 13.3 after Dodd-Frank was narrowed toward liquidity provision for the financial system, so the CARES Act had to use legal workarounds to support corporate, municipal, and household credit facilities. The CARES Act and Treasury equity backstops via the ESF effectively stretched statutory language, including the meaning of 'liquidity' and the permissible use of the Exchange Stabilization Fund. Section 14 operations such as repos and swap lines have long functioned as lending, not merely market transactions, even though their structure does not cleanly match the Federal Reserve Act's open-market language. The repeated need for these facilities in 2008 and 2020 signals that the Fed is now expected to backstop both domestic and global dollar funding markets, reinforcing dollar dominance and global financial dependence on Fed action. Congress should either update the Federal Reserve Act to reflect modern monetary realities or create separate institutions and funds for emergency credit and shadow-banking backstops.

Data Points: New York Fed job start: 2009 - Menand says he landed a job in the research division at the New York Fed in 2009. CARES Act Treasury equity backstop: $454 billion - The CARES Act appropriated funds for Treasury to invest in Fed facilities supporting credit programs. Exchange Stabilization Fund investment: $10 billion - Treasury used ESF resources to support the CPFF, MMFLF, and TALF. Exchange Stabilization Fund appropriation: $500 billion - The CARES Act later appropriated this amount to the ESF for investments in Fed facilities. Early Fed lending under Section 13.3: about $1.5 million - Menand notes the Fed made limited lending under 13.3 in the 1930s. Number of liquidity facilities: 7 - Menand categorizes the Fed’s ad hoc liquidity programs into seven facilities. Number of credit facilities: 7 - He also groups the Fed’s credit-oriented facilities into seven programs. Post-2010 Dodd-Frank constraint: liquidity to the financial system - Dodd-Frank required emergency lending policies to ensure programs were for providing liquidity to the financial system.

Pivotal Quotes: "money is perhaps the quintessential technology of modern society" — Lev Menand: Menand explains why he studies monetary architecture and financial stability. "the liquidity facilities are basically set up to be airsats discount windows for these shadow banks" — Lev Menand: He describes the purpose of the Fed’s liquidity backstops for repo, commercial paper, MMFs, and foreign dollar funding markets. "Congress should think very hard about whether they want the Fed to be a state bank, to be a national investment authority" — Lev Menand: His policy recommendation for how Congress should respond to the Fed’s expanding credit role.

Implications: The Fed has become the de facto backstop for shadow banking and even parts of industrial policy. Listeners should expect pressure for legal reform, clearer emergency authority, and new governance around dollar backstops and credit allocation.