Treasury Secretary Mnuchin on Thursday announced that the Fed’s corporate-credit, municipal-lending and Main Street Lending programs won’t be renewed on December 31. Democratic congressmen opposed the decision, misinterpreting it as an act of economic-policy tightening or a way to make life difficult for the incoming Biden administration. In fact, it’s a logical move to reappropriate much of the $454 billion in unused CARES Act funds for fiscal policy, such as an extension of the Payment Protection Program (PPP) for still-insolvent small businesses and an extension of enhanced unemployment insurance for people still out of work.
First, the primary and secondary corporate facilities, along with the municipal program, were there to provide liquidity to markets that were dysfunctional during the sell-off in March (when yields on corporate bonds and municipal bonds were rising rapidly). After these facilities were launched, yields in these markets fell rapidly as they awaited the Fed’s asset purchases, and liquidity was restored to the system. Illiquidity is no longer an issue (if it were, corporate- and municipal-bond yields would have spiked on the announcement, which they did not). Nonetheless, if liquidity dried up again, these facilities could be reopened instantly with the backing of the Treasury Exchange Stabilization Fund. And in addition to the $50 billion in the Exchange Stabilization Fund, roughly $25 billion of CARES Act funds will be left at the Fed to finance existing lending. On the other hand, insolvency, particularly for small businesses, remains a major issue as lockdowns remain in place across the country despite positive vaccine data.
As of early November, the assets in the corporate-credit and municipal facilities (originally intended to restore liquidity to their respective markets) stood at only $13 billion and $1.7 billion respectively — a small fraction of the Fed’s now approximate $7 trillion balance sheet.
Finally, the Fed has failed to maximize the use of its Main Street Lending Facility, which is intended to lend to larger private businesses that do not have access to public markets or PPP loans (which target small businesses with under 500 employees). As of November 9, the assets lent through the Main Street Lending Facility stood at only $4 billion, largely due to the fact that the Federal Reserve is not well-equipped to lend directly to non-financial private companies on a broad scale (historically its lending powers have been used for financial institutions). The Fed has also set a number of strict guardrails, including credit assessments based on low leverage ratios. If the Fed needed to, it could use Treasury Exchange Stabilization Funds to continue lending the $4 billion in the Main Street Facility without any of the CARES Act money appropriated to it.
The broader point is that the Fed has used only $28 billion of the $2 trillion in lending power granted to it by the CARES Act. Shockingly, the Fed has pushed back with a statement saying, “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”
Given congressional gridlock over more fiscal stimulus, why not use the $454 billion already appropriated by the CARES Act to extend the expired Paycheck Protection Program (PPP)? It’s actually a crafty solution.
Fed chair Jay Powell himself has said repeatedly that the Fed has the power to use “lending tools, not spending tools,” the latter belonging to Congress. Jay Powell and other Fed officials have repeatedly asked for more fiscal-policy accommodation, saying that with “too little support” from fiscal policy, the government runs the risk of bringing “unnecessary hardship.”
Mnuchin found a crafty way to increase fiscal support by redirecting federal funding set to expire by the end of the year.
The second issue is that by statute these facilities are set to expire on December 31. If Congress wants to extend Treasury-backed CARES Act lending programs beyond December 31, it’s up to them (who have the power of the purse), not the Treasury Secretary, to pass new legislation. While some legal scholars suggest that Treasury and the Fed have room to consider ignoring the CARES Act statute entirely, doing so would likely trigger legal action and engender serious mistrust between Congress and the executive, inhibiting the ability of Congress to pass future economic relief measures in good faith.
It’s also up to Congress to change Dodd-Frank’s amendments to Section 13(3) of the Federal Reserve Act, which in the first place require Treasury’s backing for such lending to private firms. In 2008, money for the Fed’s crisis-lending facilities such as TALF did not originate from the Treasury and therefore did not require congressional approval to disburse funds. Mnuchin is simply following the same procedures prescribed by a Democratic Congress and signed into law by President Obama back in 2010.
Unless the Fed can find a need to lend $2 trillion over the next month, returning the $454 billion appropriated by the CARES Act for the purposes of providing fiscal support to help those in need is a fairly straightforward bipartisan idea.