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WASHINGTON (Reuters) - The U.S. Federal Reserve is limited in its ability to lend to states and municipalities or buy their debt, Fed Chairman Ben Bernanke said in a letter to a lawmaker made public on Wednesday.
"The Federal Reserve Act provides the Federal Reserve with only limited ability to purchase directly the obligations of states and municipalities," Bernanke wrote in a letter to Rep. Paul Kanjorski, a Pennsylvania Democrat.
"In addition, the Federal Reserve generally has little or no authority to lend directly to a state or municipal government," he said in the October 28 letter.
Bernanke said decisions regarding the use of federal money for states and localities are political, and should therefore be taken by elected officials.
The Treasury Department also told Kanjorski in a November 10 letter it was unlikely to provide funds directly to local government.
"We believe that the most effective solution for these municipalities is a stable financial environment, and we believe the EESA is sufficient to provide that," Treasury's assistant secretary for legislative affairs, Kevin Fromer, wrote to Kanjorski. He was referring to the Emergency Economic Stabilization Act of 2008.
Kanjorski had urged the authorities in an October 16 letter to use their powers to help states and municipalities, which he said were hard hit by the financial crisis.
"At a time when financial institutions and commercial corporations are receiving extraordinary help directly from the federal government, we cannot turn our backs on states and localities," Kanjorski said.
But Bernanke said the Fed does not want any new authority to lend to states or municipalities. Limitations on its lending preserve the political independence of the central bank and the freedom of local jurisdictions from national oversight, he said.
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