Leading up to the Federal Reserve's important December decision on whether to raise interest rates, or keep them near zero, the U.S. central banks conducted two emergency secret meetings over the past two weeks in which the public had little disclosure of what was behind these discussions. However, one interesting and perhaps controversial decision that appears to have come out of them is that the Fed has passed a new law on Nov. 30 which eliminates one of its original 1913 mandates as being the lender of last resort for the banks.
In a decision based on the expectation of a new banking or financial crisis, the Federal Reserve on Monday chose to end the doctrine of 'too big to fail', and allow banks to succumb to bankruptcy without the ability to borrow money from the central bank in case of an emergency.
When the Federal Reserve Act was passed a little more than 100 years ago, the central bank was formed with two primary mandates to help protect the public and the banking system from any panic that may occur if there was a liquidity or insolvency problem that permeated throughout the financial system. And acting as the lender of last resort was chief among those original mandates.
The US Federal Reserve adopted a new law on Monday, limiting its ability to lend emergency money to banks. Under the new ruling, financial institutions can no longer receive emergency funds from the Fed under any circumstances, even if they are going bankrupt. The decision comes as the latest measure in a series of reforms to prevent the next financial crisis. "There are still loopholes that the Fed could exploit to provide another back-door bailout to giant financial institutions," Senator Elizabeth Warren told CNNMoney. During the 2008 financial crisis, the Fed refused to bail out investment bank Lehman Brothers. Lehman's bankruptcy became the largest in US history. - Russia Today
Out of all the functions and programs implemented by the Federal Reserve since the Credit Crisis of 2008, this appears to be the most confusing since it goes against the primary reason why a central bank was instituted back in 1913. And to suddenly change course seven years after the last financial crisis rocked the global banking system by choosing to shut off the liquidity spigot says a great deal about the solvency of the Fed itself, and even what the Board of Fed Presidents thinks may be coming that would find it to purposely willing to to allow banks to fail on their own accord.
With the Dodd-Frank Banking Reform Act now allowing banks to re-hypothicate its own customer's money and accounts in the event of a liquidity crisis shows that the U.S. central bank no longer has to follow their original mandate of being the lender of last resort since it is now the public that will provide the funds to bail out banks during future crises. And with this new law being instituted not by Congress, but by the Fed itself, one must ask if the need and purpose of a private central bank is even necessary anymore, since its primary purpose is no longer being used to protect the banking system from bankruptcy or insolvency.