Fed, Treasury Point Fingers At Each Other

Federal Reserve Board chairman Ben Bernanke is suggesting that state and local governments facing fiscal difficulties seek grants, loans, or guarantees from the Treasury, while a Treasury official contends they should ask the Fed about participating in its commercial paper purchasing program.

Neither of the officials believe their own agencies can offer any assistance to state and local governments, according to separate letters they sent earlier to Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services capital markets subcommittee. The letters were not publicly released until yesterday, when the congressman disclosed them.

Kanjorski wrote the agencies in October urging them to provide help to state and local governments, which have had trouble accessing the short-term market, borrowing money for read-to-go projects, and meeting their budget needs because of plummeting tax revenues.

Bernanke responded on Oct. 28 , saying the Fed "has little or no authority to lend directly to a state or municipal government" and does not plan on seeking any such authority from Congress.

"The Federal Reserve Act provides the Federal Reserve with only limited ability to purchase directly the obligations of states and municipalities," he said.

"The Congress wisely established these limitations to support fundamental principles such as independence of the central bank and a strong federal system of government in which states and municipalities have powers and responsibilities that are not subject to review or oversight at the national level," Bernanke told the lawmaker. "We believe that it is important to preserve these basic principles and, as a result, we would not seek any new statutory authorities at this time."

Bernanke said, however, that state and local government officials "may wish to discuss directly with the administration and the Congress the potential for direct aid from the U.S. Treasury, perhaps in the form of grants, loans, or guarantees."

"Because decisions regarding the possible allocation of federal funds to state and municipal governments are inherently political, these matters should be discussed and ultimately determined by elected officials rather than appointed officials such as those at the Federal Reserve," he said.

But in a Nov. 10 letter to Kanjorski, Kevin Fromer, Treasury assistant secretary for legislative affairs, said: "We are sensitive to the financial troubles facing municipalities as a result of strained credit conditions .... However, we believe that the most effective solution for these municipalities is a stable financial environment, and we believe that [the Emergency Economic Stabilization Act] is sufficient to provide that."

The act authorizes the Treasury to spend up to $700 billion to purchase the distressed assets - especially mortgage-based securities - of banks and other financial institutions. But Treasury officials have repeatedly told reporters during press conferences that the Troubled Asset Relief Program they set up under the act does not include state and local governments or tax-exempt securities.

"Your specific suggestions about the use of the Commercial Paper Funding Facility are best directed to the Federal Reserve, who is responsible for its operation," Fromer told Kanjorski.

A spokesman for Kanjorski said yesterday that the congressman has no response to the Bernanke and Fromer letters at this time.

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