Senator Warren has decided to take on the Federal Reserve over its lender of last resort role.  Specifically, in her speech, The Unfinished Business of Financial Reform, she observed

Congress must carefully limit the Fed’s ability to provide emergency lending to a giant bank that gets into trouble. In the 2008 crisis, the Fed used its authority to provide – I’m glad everybody’s sitting down – $13 trillion dollars in low-cost loans to a handful of Too Big to Fail banks. Think about that: it wasn’t TARP or anything the Congress voted on. On their own, the Fed just kept shoveling money at nearly zero interest rates into a half-dozen Too Big to Fail banks. Congress should step in and make clear that the Fed isn’t the personal piggy bank for biggest financial institutions in this country.

While she focuses on the amount of funds the Fed lent under its lender of last resort role, what really concerned Senator Warren was the pricing of these funds.

As I discuss in Transparency Games, thanks to Mark Pittman and Bloomberg, we know that the Too Big to Fail banks received a boost to their net income of upwards of $13 billion as a result of these below market rate loans.

As Senator Warren points out, this boost to the Too Big to Fail income was a transfer from the taxpayer to the bankers without Congressional approval.

This point is very important and needs to be repeated:

Under Ben Bernanke’s leadership, rather than observe Walter Bagehot’s dictum of lending against good assets at a penalty rate of interest, the Fed took it upon itself to give $13 billion of taxpayer money to the Too Big to Fail Banks.  Money the bankers subsequently helped themselves to by paying themselves bonuses.

Senator Warren is right that bankers should not be able to loot taxpayers as a result of the Fed acting as a lender of last resort.

Where I disagree with Senator Warren is over how she would prevent this from occurring in the future.  She would try to legislate Bagehot’s dictum.  I would use transparency to enforce Bagehot’s dictum.

If banks have to disclose their exposure details, including their borrowings from any Fed programs, everyone could see if the rate the Fed was charging the banks was above, at or below market rates.  This visibility would subject the Fed to market discipline if it failed to observe Bagehot’s dictum.  Discipline that would undoubtedly cost the Fed its independence.