Question

In a crisis, if the Federal Reserve would like to purchase assets that they are not allowed by law to have on their balance sheet, which of the following options do they have at their disposal.

Make a loan to a special purpose vehicle, which can buy these assets

Lend money to state governments who can then buy these assets

None of these

Lend money to fund managers who can then buy these assets

Print money and give it to banks who can then buy these assets

Answer 1

During the times mentioned, where Fed would like to buy assets which it is not legally allowed to buy, Fed sets up special purpose vehicles which can buy those assets. These SPVs can buy those assets or lend to other entities who can buy those assets. Under the federal reserve act, SPVs need taxpayer's backing from treasury, which will help Fed cover their losses. So, among the given options, Federal reserve will make a loan to special purpose vehicle, which can buy these assets.