In a seemingly routine announcement, outgoing Treasury Secretary Steven Mnuchin abruptly urged the Federal Reserve to return the money previously brought forward this year to make emergency purchases of corporate bonds, municipal bonds, loans to midsize companies, and almost any public or private To act on institutions that were in distress due to the economic consequences of the COVID-19 pandemic.
Many of these programs totaled hundreds of billions of dollars, and while largely untapped in the worst of spring, they remained as a potential ballast for further economic downturns. Their size was quite exceptional, allowing the Fed to use its lending instruments more than ever before to expand trillions of dollars in everything from the company that employs 500 people in a small Midwestern town to buying municipal bonds made by a large metropolis issued government bonds issued by a government. The spring promise was enough to stabilize the market for these bonds without the Fed actually having to spend a lot. But with COVID-19 on the rise across the country, and state-by-state new restrictions put in place as individuals prepare for more widespread contagion, these programs may be needed in the coming months, just as Mnuchin seeks to end.
This is a serious mistake. It’s the complete opposite of what should be done. And it is all the more a mistake as Congress is currently unable to pass a new round of fiscal incentives, in line with what we saw in the spring when the first CARES bill was passed, and individuals and companies several Delivering trillions of dollars in needed aid. In fact, not only should these programs not quit. They should be expanded, and then improved, because unless Congress does its job (no doubt a fascinating concept) as the nation’s treasury and opens the cones and spends now, the United States is facing not just a long COVID winter, but one economic This, too, will only be extended if there is a widespread vaccination program, but much longer.
Since the Great Depression, times of severe economic pressures have required aggressive action by the federal government to spend money to get the economy going until it can sustain itself. Until recently, it was the responsibility of Congress to assign these and implement the executive branch. In 2008-2009, the demands of the financial crisis also required the Federal Reserve to take aggressive measures that expanded bank lending well beyond the current level. The policy of « quantitative easing » was not invented in 2008, but the scale after that was new.
The Fed’s spring guarantees to buy virtually any financial asset went well beyond those efforts in 2008-2009, along with a promise to invest several trillion dollars in the system if needed. While much of that money was not spent, the promise alone was enough to strengthen the financial system and prevent a health and economic crisis from turning into systemic breakdown.
It is these contingency programs that the Treasury Department is now trying to end, under the false assumption that the worst of the economic crisis is over, and perhaps under the basic premise that as unemployment and business failures accelerate, the drawing of these lines of credit increases burden the incoming Biden administration. Mnuchin attempted damage control when his decision was widely attacked by saying these programs can be restored at any time, which doesn’t answer the question of why they are being terminated on the spot. While the Treasury Department and the Trump administration can’t completely restrict the Fed (which is still an independent agency), they can limit the extent of what the Fed can do at precisely the point in time when the need for what it can do rises more acute.
The problem, of course, is that Congress, which should pass another stimulus bill, should have passed one by now, and possibly before the election. But if Congress doesn’t act, it will be like spring, but without the emergency infusion. And if Congress doesn’t act, the Federal Reserve must.
Aside from the policy that demands that the Fed become the primary bulwark against severe economic contractions, this is fundamentally and politically controversial. The Fed is supposed to monitor, regulate and maintain the stability of the monetary system. It is not intended to be a substitute for fiscal incentives. Or to put it in simple English, it is supposed to ensure that the financial system has neither too much nor too little money, but it is not supposed to replace Congress as the body responsible for government spending.
That is true in normal and even unusual times, but should it be true in desperate times?
The argument is that the favor is simple: it is becoming more and more likely that Congress in 2020 will not provide additional incentives. While it is theoretically possible for some amount to be agreed upon if the Democratic House and Republican Senate approve further funding for the U.. S.. . Government in December, the White House pulled out of negotiations and neither party seems at all urgent to do anything before a new Congress and President are sworn in at the end of January.
But the world won’t stop until then as the United States faces another spike in COVID-19. Economic activity is slowing again and will almost continue to deteriorate by 2021. The rise in flight bookings is falling again amid new government activity restrictions and widespread concerns about vacation as a source of transmission. Cities warned of sharp cuts in essential services as early as January, and small businesses are again struggling as they run out of federal-backed emergency loans in spring and summer.
Cities and towns that may be hardest hit. One of the main reasons behind the earlier negotiations on a new stimulus plan was to help state and local governments. The Republicans and the president were firmly against « bailing out » the local governments they claim were poorly managed before the pandemic. In New York, transit authorities are warning of massive cuts in services that will almost certainly hamper the recovery of a metropolitan area that accounts for nearly 9% of total United States GDP. This alone could be solved by the Fed, which lends billions at low interest rates.
And that is exactly what many believe it should not do. Former Dallas Fed Governor Richard Fisher, widely admired on all sides of the political spectrum and currently working with Texas on its economic recovery, is concerned about the Fed being used and viewed as a last resort. He understands the temptation to turn to the Fed as a Hail Mary pass since Congress is not doing its job and purposefully demanding that something be done to avert the collapse. Still, he warns: « Central banks shouldn’t replace the tax authorities and if you give in, let them off the hook. Once we open that convenience door, there is no way you can close it. ”
The case against the Fed, which is doing more, is that we are creating structures and rules based on the long-term requirements of a functioning, balanced and audited system. It’s always tempting to break these rules and violate these principles at a moment of coercion, but Fisher believes that the more the Fed deviates from its track, the worse it will be for our economy in the long run. It becomes a systemic form of moral hazard: if Congress knows that it can evade its financial responsibility because the Fed is compensating for it, it will never be forced to expect its own dysfunction.
That’s a fair argument, and 99% of the time it is probably the right one. But on very rare occasions there are real emergencies, and the devastation of this pandemic cannot be underestimated. Now it is time. The Fed has the means and we don’t have much time to avert additional economic damage that could last for years. Let’s call it expediency; call it necessity; even call it fundamentally wrong. But do it anyway.
Federal Reserve System, Steven Mnuchin, Federal Reserve, Pandemic, Treasury Department, Finance
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