Here is a disturbing, though not unfathomable, possibility envisioned by Economics of Contempt:
Let’s say the European sovereign debt crisis flares up again, and one or two Euro banks fail. (Not a bank like UBS or Deutsche Bank, but a medium-sized bank like Bank of Greece or a Landesbank.) That, in turn, causes a U.S. money market fund — many of which have large exposures to Euro banks — to “break the buck,” which leads to another run on money market funds.
The Fed would be powerless to help. The Fed’s emergency lending authority (the famed Section 13(3)) requires that any emergency lending facility to non-banks be approved “by the affirmative vote of not less than five members” of the Fed Board of Governors. Currently, there are only four members of the Fed board: Bernanke, Warsh, Elizabeth Duke, and Dan Tarullo. Donald Kohn retired earlier this month, and the Senate has yet to vote on Obama’s three nominees (Janet Yellen, Peter Diamond, and Sarah Bloom Raskin).
This continues to be an embarrassing situation that hasn’t received enough attention. The three nominations have been held up since Obama named them in April. Each was confirmed by the Senate Banking Committee in July but have yet to go before the full Senate for confirmation.
Whatever your politics or views on what the Fed should do, all three of these nominees are qualified.
And delaying the full vote is problematic for another reason other than the one noted by Economics of Contempt.
As each member of the Board is a non-rotating member of the FOMC, this ongoing delay also adds confusion to the task of discerning the future direction of monetary policy. Given the friction that already exists within the committee, this vote should be higher on the Senate’s list of priorities.