Did the Fed bend its own rules by bailing out Bear Stearns?

By: PAUL JACKSON
March 21, 2008

A thought-provoking story at Bloomberg notes that the Federal Reserve bypassed the emergency-lending policies in the Federal Reserve Act while helping prevent Bear Stearns from slipping under the waves:

Guidelines revised in 2002 say the Fed should charge non- banks more than the highest rate that commercial banks pay. Instead, Chairman Ben S. Bernanke and his colleagues, in emergency votes on March 16, invoked broader authority in the Federal Reserve Act to give Wall Street dealers the same rate as banks, a Fed staff official said on condition of anonymity.

…The Fed’s haste in setting aside its own guidelines is “troubling,” said Vincent Reinhart, who worked at the central bank between 1983 and 2007 and is now a scholar at the American Enterprise Institute in Washington.

“The regulation is very clear as to the circumstances of the loan, and it is odd that they wouldn’t apply a regulation that would seem to encompass what they want to do,” said Reinhart, who served as head of the Division of Monetary Affairs under Bernanke and his predecessor Alan Greenspan.

Not everyone is questioning the Fed’s motives, of course — many will tell you the Federal Reserve Act is itself a dinosaur and out of touch with current market mechanics — but the fact that enough are strikes us as interesting.