Just as it seemed Congress might finally reach a deal on a new stimulus package, there was a new and unexpected wrinkle: Some Republicans have suddenly discovered they’re really worried about a handful of emergency lending programs from the Federal Reserve that most Americans have probably never even heard of. And they have told Democrats that unless these programs are wound down, there’ll be no deal.
The hitch comes after months of back-and-forth, and amid great time pressure. Republicans and Democrats this week have been inching toward a $900 billion agreement to help boost the economy as the Covid-19 pandemic rages on, and they made plans to attach the deal to government spending legislation that must be passed by Sunday night to avoid a government shutdown.
Both sides made some concessions in the bill — Democrats let go of aid for state and local governments, and Republicans dropped their ask for liability shields for corporations (which would ensure companies couldn’t be sued for coronavirus-related issues). But while there were still some issues to be ironed out — what to do on unemployment aid and stimulus checks, for example — it seemed like there might finally be a breakthrough. And yet.
Sen. Pat Toomey (R-PA) is leading a push by Republicans to try to rein in some of the Fed’s capabilities to intervene in the economy through lending programs aimed at small businesses and state and local governments. Specifically, Toomey says he wants to wind down emergency lending programs that were created by the CARES Act back in March; and, on top of that, include provisions in this new legislation that would stop the Fed from being able to restart those programs — or create similar ones.
Toomey’s argument is that the Fed, which has taken extraordinary actions to try to boost the economy during the pandemic, risks becoming a lender of “first resort” instead of “last resort,” as it is meant to be, if its powers are extended.
Democrats, on the other hand, are crying foul and argue that this has nothing to do with when businesses and governments turn to the Fed, and that the effort actually represents an effort from Republicans to limit the economic tools available to President-elect Joe Biden before he even takes office.
“After weeks of refusing to acknowledge Biden’s victory, some Republicans have now decided that sabotaging his presidency is more important than helping our economy recover,” Sen. Elizabeth Warren (D-MA) said in a statement on Friday. “Proposals to sabotage President Biden and our nation’s economy are reckless, they’re wrong, and they have no place in this legislation.”
And Democrats are also concerned that if the language on new Fed limits is too broad in the final legislation, this would severely weaken the Fed’s ability to do emergency lending in times of economic stress. Toomey insists that the language is targeted and that concerns about its broader impact — both with respect to future crises and Biden’s presidency — are overblown.
The situation is a bit of an odd one. Republicans have been dead set against support for state and local governments throughout the pandemic, and this appears, in part, to be a way to make sure the Biden administration doesn’t find a workaround to get them money through the Fed.
At the same time, the CARES Act programs in question haven’t worked very well so far — localities weren’t really picking up what the Fed was putting down. Democrats say that the programs could be improved to work better under a Biden administration and therefore be used by more potential borrowers: Essentially that they may not be a panacea, but they’re not not worth trying.
Still, according to former Federal Reserve economist Claudia Sahm, Democrats may be overly optimistic about how effective the programs might be in the future.
“Those programs had the potential to at least work better in a Biden administration than Trump,” Sahm told me, “but they were never going to do, without more Congressional authority, what Democrats wanted.”
The Fed is supposed to be there when things are really bad
In the midst of the Great Depression in 1932, Congress authorized the Federal Reserve to make direct loans in emergencies. That basically means that in big moments of economic crisis, you want the central bank to be there to make sure markets don’t go too haywire.
The Fed makes those loans under section 13(3) of the Federal Reserve Act. In the wake of the 2008-2009 financial crisis, Congress put some restrictions around the Fed’s emergency lending powers in the Dodd-Frank Act of 2010, which, among other things, required the central bank to go through Treasury to make loans.
So when the Covid-19 pandemic hit, Congress, through the CARES Act, directed $454 billion toward the Treasury Department to backstop emergency lending programs, including one aimed at mid-sized businesses and another aimed at municipalities.
A lot of that money wasn’t used, and in November, Treasury Secretary Steven Mnuchin asked the Fed to return it at the end of the year. Fed Chair Jerome Powell agreed to return the money, albeit begrudgingly.
As Politico’s Victoria Guida laid out on Twitter, Toomey, a longtime skeptic of the Fed’s power, wants to make sure the CARES Act-related lending programs are permanently ended, because he and other Republicans worry Democrats will give “overly generous loans” to businesses, cities, and states. Republicans want to make sure the programs are ended now to block incoming Treasury Secretary Janet Yellen (assuming she’s confirmed) from using other funds to restart the programs.
The rub here is exactly what the language Toomey is describing would do. If it blocks new emergency lending programs for small businesses and municipalities, that’s bad for those potential loan recipients, but would just leave them in a fairly similar position to where they are now. The terms of the loans haven’t been generous enough that many states and businesses were willing to try to take them on, though Democrats argue that under Biden that could be fixed.
Still, the larger concern is that it might hamstring the Fed’s ability to exercise its broad emergency powers and do real, lasting damage to the central bank and its role in fighting economic downturns.
Former Fed Chair Ben Bernanke issued a statement over the weekend warning about the potential implications of the GOP’s proposal. He stressed that it is “vital” that the Fed be able to “respond promptly to damaging disruptions in credit markets” and that such ability not be curtailed. “The relief act should ensure, at least, that the Federal Reserve’s emergency lending authorities, as they stood before the CARES Act, remain fully intact and available to respond to future crises.”
The concern is that if Toomey’s proposals are too sweeping, the Fed might have to ask Congress every time it wants to act on emergency lending during times of crisis.
A spokesperson for Toomey said in an email that the senator doesn’t want to change how the Fed operates generally — but that what he is seeking is to ensure that lending facilities set up under the CARES Act are wound down at the end of 2020, and that no copycat facilities can be created. The spokesperson said that a speech the Pennsylvania Republican delivered on the Senate floor on Saturday “makes clear that the intent of this language is narrow and is not a sweeping rewrite of section 13(3), as some have suggested.”
As Jordan Weissmann at Slate points out, however, Republicans want to block the Fed from restarting lending programs that are “similar” to the ones from the CARES Act. What exactly “similar” means is where the problem is.
“If your language is very squishy, that can either mean you have a very expansive interpretation of it, or you have a very narrow interpretation of it,” Sahm said. And if the definition of “similiar” is too expansive, that could dangerously kneecap the Fed.
“These emergency facilities, that power to do emergency lending, that is more important than monetary policy, than bank regulations. This is the thing that the Fed does, it’s the thing we absolutely have to have,” she said. “These are core powers of the Fed, and so if you’re taking this away, you’re really crippling the Fed.”
“The risk is that it greatly diminishes the ability of the Fed to exercise its emergency powers and support the economy in the next crisis,” Roberto Perli a partner at Cornerstone Macro, told Bloomberg. “If I were the Fed, I would strenuously oppose this.”
This is a bit of a hostage situation using the Fed
The American people need help, and they need help now. Millions are at risk of eviction in January, millions are out of work, and millions are hungry. Congress has the power to change this, and it needs to do it. It’s not clear what the really good-faith argument is for why curbing the Fed’s emergency lending programs mid-pandemic is worth mass homelessness or stopping people from accessing basic necessities.
But on its face, this is an effort by Republicans to limit what Biden can do on the economy when he takes office. Especially in the event where Congress won’t take action — which it’s failed to do, basically, since March — you want the Fed to have all the tools in the toolbox available. And it’s reasonable to assume congressional inaction will continue into the Biden administration, making the Fed an even important part of recovery.
It is true that a lot of states and businesses weren’t falling over themselves to get loans from the Fed, but there’s an argument to be made that that’s not really the point: Just the knowledge that the Fed is there as a last-resort lender is meaningful in shoring up confidence in the economy and keeping financial markets moving. The Fed just saying it would buy corporate bonds kept the corporate bond market moving in the spring.
The fear that the Fed would help Biden get money to state and local governments is weird. Many in the GOP seem to believe that budget shortfalls are only a blue state problem and therefore have little desire to do anything to help, or, in this case, seem hell bent on blocking any potential aid. States run by Democrats are absolutely not the only ones facing tax revenue declines, but also, the point of lawmakers is to care about all Americans, not just the ones who align with them politically.
“It is clear that Republicans in Congress and the administration do not want to give money to state and local governments,” Sahm said. Why Republicans would be willing to hurt their own states in order to also hurt Democratic ones is far less clear.
The argument that the Fed should need to rely more on Congress to get the go-ahead on emergency lending programs is tough to swallow, given the events of this year. It was good back in March that Treasury and the Fed could quickly work together to really turn on emergency facilities and enact other market-stabilizing measures. Imagine them having to go through Congress, which is right now getting by on a two-day bill to fund the government, because it couldn’t meet a deadline that comes at the same time every year.
And if Republicans really do want to reform 13(3) powers, like lawmakers did for Dodd-Frank, doing so hastily seems not ideal. “To rewrite 13(3) lending law like that on the fly seems pretty disturbing,” Bharat Ramamurti, a member of the Congressional Oversight Commission that oversees the CARES Act funds, told Slate. He pointed out on Twitter that the GOP’s current position seems like a radical evolution of their earlier stance: In stimulus negotiations in the fall, Republicans were trying to end the current the CARES Act’s current lending programs, not permanently strip the Fed of those powers.
Of course, there’s no way to know intentions here. Maybe this is another GOP-led effort to tank stimulus. Maybe Republicans just cannot stand the idea of states getting help. Maybe they really want to tie Biden’s hands. Or maybe Toomey really thinks this is his one shot at getting reforms at the Fed and he’s taking it.
But time is running out — a deal (or an extension) has to be passed before midnight Sunday to avoid a government shutdown — and a haphazard fix to supposed problem that a couple of weeks ago wasn’t even on the radar is a roadblock the American people don’t need.