Fed breaks the bank in bid to rescue economy

Unlike the 2008 crisis, when the Fed sparked an outcry over saving non-banks like insurance giant AIG and investment bank Bear Stearns, it has now received a formal buy-in from the Treasury for many of its emergency programs. Thanks to the landmark 2010 Dodd Frank Act, Treasury Secretary Steven Mnuchin must authorize the central bank to lend to such non-bank companies in an emergency, and his department has used tax dollars to cover losses when borrowers fail.

The stimulus package that Congress is about to approve will greatly expand the amount of money available to cushion these losses. In contrast to the controversial Troubled Asset Relief program of 2008, the amount of lending will be greater than just earmarked funds.

With the Treasury providing 10 percent of the Fed’s emergency loan program, $ 425 billion from the Treasury could give more than $ 4 trillion to businesses, consumers, local governments, and money market funds.

“They opened the channels, and if the Treasury gets more money, they can expand those programs,” said Donald Kohn, former Fed vice chairman.

However, the Fed remains under scrutiny as it implements these programs, particularly when lending to large companies. The central bank, which is trying to stave off criticism from lawmakers, has previously announced that companies will be subject to restrictions on the repurchase of their own shares – which boosts share prices and disproportionately wealthier shareholders – and will be subject to CEO bonuses.

The Fed will also consult private finance companies to help manage the programs. This is a potential line of attack that she could face in the future. To this end, the central bank has already hired the BlackRock asset manager.

Still, the amount of aid aimed directly at consumers and small businesses will alleviate criticism of measures to support larger businesses, said Amanda Fischer, a former Democratic congressional adviser who is now leading politics at the Washington Center for Equitable Growth.

She said the Fed is usually more inclined to support markets directly than people. “Now we’re seeing cracks” in this approach as the central bank extends its focus on Main Street, she added.

This is partly due to the scale of the crisis and the pressure even Republicans, including Trump, are getting to do more, Fischer said.

Many free market republicans who in the past have turned to the central bank for their large footprint now sound different. Prominent GOP legislators such as Senator Pat Toomey (R-Pa.) And MP Patrick McHenry (R-N.C.) Have pushed for the Fed to do more to support companies in this crisis.

Central bank bond holdings are growing in the middle of the pandemic, a topic that has also triggered complaints from Republicans in the past. The massive purchases of treasury bills and mortgage-backed securities will correspond to the second round of asset purchases after the 2008 crisis, which took place over seven months, over the course of a week.

This is part of an effort to freeze key US government and mortgage markets and all markets into which these assets flow.

All of these unprecedented moves could change public perceptions of the Fed’s downturn, although support for similar measures in the future “will depend heavily on where the crisis begins and who pays the price,” said Kohn, the former Fed -Officer.

Bair said talks about the role of the Fed should be interrupted to see how far-reaching the economic damage could be. She added that the fastest option is to use money as a medium to strengthen the economy as the Fed prints money and controls the rails of the payment system.

“They are a very efficient transmission mechanism,” she said from the central bank. “If you think of them as administrators rather than piggy banks, this may be a better view.”

However, there are limits to what the Fed can do. One of the ways the central bank has tried to protect its authority in the past is to keep its goals relatively narrow and undisputed. For example, it refused to buy debt from cities and governments directly.

Glenn Hubbard, retired dean at Columbia Business School and former chief economist of President George W. Bush, said Congress must act to do its part, including direct money transfers to people the Fed has no authority to.

The Fed’s actions: “Every time you get into something that poses a risk, you will have political concerns about the Fed, but the Fed is a lender of last resort,” he said. “It’s doing the right thing.”

Leave a Comment