Once Again the Fed Wants to Save Us

Fed Eagle

On March 23, 2020, the U.S. central bank, the Federal Reserve, announced extensive new measures to support the U.S. economy as the coronavirus continues to ravage small businesses and the livelihood of workers.

Fed Chairman Jerome Powell not only revived the tools used in the 2008-2009 financial crisis but implemented new ones.

In 2008-2009 then Federal Reserve Chairman Ben Bernanke was charged with saving the U.S. economy from the sub-prime massacre. He did that in part by resurrecting Section 13(3) of the Federal Reserve Act, which allowed him to implement key non-conventional tools to provide liquidity directly to borrowers and investors in critical credit markets: Commercial Paper Funding Facility (CPFF), Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), Money Market Investor Funding Facility (MMIFF), and the Term Asset-Backed Securities Loan Facility (TALF).

In 2020, Fed Chairman Jerome Powell was charged with a similar task. Here is what Reuters said on the matter back on March 18,

Pressure is growing in Washington for the U.S. Federal Reserve to use its emergency powers to lend directly to businesses hurt by the coronavirus, according to four people with knowledge of the discussions.

The U.S. Treasury, senior bankers, the U.S. Chamber of Commerce, and some senior senators want the central bank to make broader use of its powers under Section 13(3) of the Federal Reserve Act to provide credit directly to businesses under “unusual and exigent” circumstances, the sources said.

Thus, the Fed established two new programs to accomplish its bidding: The Primary Market Corporate Credit Facility (PMCCF) facilitates lending to small and medium-sized business. The Secondary Market Corporate Credit Facility (SMCCF) provides liquidity for outstanding corporate bonds.

Despite enthusiasm from some quarters for an aggressive Federal Reserve response, there is apprehension.

The Cato Institute points to a constitutional issue. The U.S. was built on the principle of “no taxation without representation.” The people’s representatives in the U.S. House hold the nation’s purse strings. When the Federal Reserve (over which theoretically neither taxpayers nor Congress have any authority) provides credit with little or no recourse, taxpayers are the ones to absorb defaults without having had any say so in the matter.

In a March 27 Bloomberg Opinion piece Jim Bianco (President and founder of Bianco Research) expressed his concerns. Although the 2020 response is similar to that of 2008-2009, the 2020 programs are larger in scale. Blurring of fiscal policy (carried out by the Treasury under the direction of Congress) and monetary policy (carried out by the Federal Reserve under the direction of nobody) endangers the important separation of these two entities. Special purpose vehicles (SPVs) underlying the Fed’s 2020 rescue programs could be abused, resulting in serious distortions in capital markets.  Bianco says,

In effect, the Fed is giving the Treasury access to its printing press. This means that, in the extreme, the administration would be free to use its control, not the Fed’s control, of these SPVs to instruct the Fed to print more money so it could buy securities and hand out loans in an effort to ramp financial markets higher going into the election.

Given the fact that once government programs are put in place they remain into eternity, the American people might find itself stuck with subsequent administrations that could abuse SPVs not only to ensure re-election but also to centralize control of the economy, artificially invigorate stocks, and reward favored industries.