Emre Kuvvet
Finance Professor Emre Kuvvet recently was featured in the Wall Street Journal for an opinion piece he wrote looking into the Doomsday Book, which is an internal document that guides the Federal Reserve’s actions during a financial crisis.
His exploration of the book reveals intriguing details on some of the autonomy with which the Federal Reserve can operate when emergencies arise.
READ THE COMPLETE OPINION PIECE ON THE WSJ WEBSITE.
If you experience a pay wall, a copy of the piece is below.
Sun Shines on Fed ‘Doomsday Book’
Through a simple Freedom of Information Act request, I obtained the mysterious document.
(Dec. 11, 2023) The so-called Doomsday Book, an internal document used to guide the Federal Reserve’s actions during emergencies, has long been the subject of intrigue and suspicion. Largely a compilation of legal opinions, the book has been a key resource for the Federal Reserve Bank of New York for decades, allowing it to play a unique and oversize role during financial crises. No other regional Federal Reserve bank has such a resource.
The book is a living document that records pivotal decisions made during times of financial distress. It played a crucial role in then New York Fed President Timothy Geithner’s decision to rescue Bear Stearns from bankruptcy in 2008.
A few details about the book have dribbled out in the past, notably in 2014 during the Starr International Co. v. U.S. trial, in which a group of former equity investors in
American International Group sued the government over the terms of the firm’s 2008 bailout. The Journal reported that David Boies, a lawyer for the plaintiff, had obtained three copies of the book, “likely under subpoena.” But it remained under seal and “Mr. Boies was careful not to quote from any of the versions of the book or reveal specifics about what the books contained.”
A prior Freedom of Information Act request to the Board of Governors of the Federal Reserve System for the book was rejected. For reasons unknown to me, however, I was recently able to acquire a copy of the book through a simple Freedom of Information request to the New York Fed. Only names were redacted.
The document reveals a fascinating history of diverging perspectives on the Federal Reserve’s emergency powers. Instead of adhering strictly to clear legislative boundaries to justify its actions during financial crises, the central bank appears to ground many of its decisions in the New York Fed’s belief in the Fed’s discretionary authority. It relies on precedent for many of its actions, without explicit congressional authorization in some instances.
This approach implies that establishing clear legislative boundaries for the Fed might be a futile endeavor because the central bank—or at least the legal team at its dominant member bank—apparently believes it can rely on precedent to justify virtually any emergency action.
The book also exposes an apparent split in perspective between the New York Fed and the Fed Board of Governors. At the core of this disagreement are differing interpretations of the central bank’s legal powers, particularly Sections 13(3) and 14(b)(1) of the Federal Reserve Act, which allow the Fed to take extraordinary actions in financial crises. The New York Fed, wary of the complexities of financial markets and the unpredictable nature of crises, embraces a flexible interpretation of these laws. The board adopts a more cautious approach that underscores the importance of adhering closely to legal limits.
This difference in perspective comes to the fore in the document’s history of the Fed’s response during the 2008 financial crisis. The New York Fed emerged as the Fed’s firefighting department, urging a more proactive stance, even suggesting that its powers extend to rescuing municipalities. The board, on the other hand, tried to ensure that Fed actions remained within well-defined legal confines. The book suggests that over time, the board has tended to yield to the New York Fed’s legal arguments during crises, indicating a shift toward a more flexible approach.
The New York Fed’s broad interpretation of the Fed’s powers isn’t without reason. It contends that the complexities of financial crises require the discretion that would allow the Fed to respond promptly and effectively. It thus justifies its various actions—from securities lending to guarantees and gaining ownership stakes in companies—as being within its powers. Moreover, the New York Fed’s invocation of “practice” as a basis for some actions underscores its belief in its authority, even without explicit congressional authorization. While this proactive stance might be practical in times of crisis, the board’s cautious approach seeks to prevent potential overreach to maintain the integrity of the Fed’s mandate.
These differing views have profound implications for future crisis responses. With these and other disclosures, we can understand why the Fed has avoided transparency: It isn’t able to speak with a single voice during emergencies. That doesn’t excuse its secretiveness, however, because the central bank, despite its independence, needs to be held accountable for its actions.
There will always be disagreements about the wisdom of certain Fed actions, but the disclosure of the Doomsday Book should enable Congress to understand the basis and judge the legality of its actions. This could pave the way for discussions about the need to revise laws to ensure that the Fed operates within its intended constraints. It could also prompt broader conversations about the role and authority of the central bank.
While the Fed’s flexibility is crucial during times of crisis, ensuring that its actions operate within legal boundaries is equally important. As the authority that established its mandate, Congress can revise and modify those boundaries if needed.
Mr. Kuvvet is a professor of finance at Nova Southeastern University. This is adapted from an article that will appear in the Spring 2024 issue of the Independent Review, published by the Independent Institute.
