We can now add Steve Mnuchin to the list of Trump officials who are doing their part to undercut the next administration before moseying out the door. On Thursday evening, the Treasury secretary announced that he would not agree to renew a series of lending efforts that the Federal Reserve began earlier this year in response to the coronavirus crisis, a move that could hamstring the central bank’s ability to stabilize the economy and financial markets if things get choppy again once president-elect Joe Biden is in office.
Suffice to say, none of the explanations Mnuchin has offered for the decision makes much objective sense, which makes it hard to read it as anything other than an intentional act of sabotage.
When Congress passed the CARES Act earlier this year, it set aside $454 billion to jump-start a handful of emergency credit programs through the Fed, including one that allowed it to buy corporate debt. Through the magic of leverage and guarantees, the money was actually enough to support up to $4 trillion of lending, a giant rocket launcher of cash resting on the shoulder of Fed Chair Jerome Powell. (Many progressives bemoaned this as the “corporate bailout” portion of the law.) At the time, debt markets were seizing up as investors panicked over the accelerating pandemic. By promising to be a lender of last resort for big companies, the Fed calmed Wall Street down, and pretty soon, credit began flowing again like normal, helping to prevent further economic catastrophe.
These programs are currently set to expire on Dec. 31, and need Mnuchin’s permission to continue, since Treasury controls the money that lawmakers set aside to backstop them. He isn’t giving it. In a letter to Powell, he said he would let the corporate debt facility sunset in the new year, along with programs that let the central bank buy municipal bonds and get loans to small businesses. He then went a step further and asked the Fed to return any unused cash to the Treasury so that it could be used elsewhere. This was the most important bit: In theory, the next Treasury secretary could give the Fed permission to restart these credit vehicles. But taking away the current funding would make that much harder.
The Federal Reserve, for its part, is visibly ticked off about this turn of events. Earlier this week, Powell had suggested that he thought now is too early to end the emergency lending programs, saying, “When the right time comes, and I don’t think that time is yet or very soon, we will put those tools away.” Then, in response to Mnuchin’s letter, the Fed shocked many observers with a rare public statement breaking with Treasury. “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,” it said. While the language was dry, make no mistake: For the financial markets, this was the equivalent of Mom and Dad having a screaming match in the car.
It’s possible that the demise of these programs wouldn’t make much of a difference to the grand scheme of things. The Fed hasn’t really had to fire its cash cannon since arming up, because investors have been so reassured by its mere presence (the central bank has bought just $13.5 billion of corporate debt after promising to snap up as much as $750 billion if it needed to). The bond markets could go on working fine, once the corporate loan program is shut down for good. The small-business and municipal lending efforts, meanwhile, have largely been seen as a bust, because the Treasury insisted on saddling them with onerous terms. As Mnuchin noted in his letter, the Fed may be able to restart some of the programs using the money in its Exchange Stabilization Fund, which technically contains $74 billion (though it’s not clear how much of that is actually available). “To the extent these need to be reactivated, we have over $800 billion of capacity so I consider that to be a pretty good bazooka,“ he told CNBC.
Still, there’s no real way around the fact that Mnuchin is trying to cut down the reassuring safety net that has kept investors calm for the past 10 months, while potentially boxing Chuck Schumer and Nancy Pelosi in as they haggle the next coronavirus relief package. Although it’s been a disappointment so far, Democrats have been looking to spruce up the municipal bond program as a way to get aid to state and local governments if Republicans refuse to include enough of it in a bill. As the New York Times writes, “Taking that program off the table would leave Democrats with fewer options—and give Republicans another bargaining chip in stimulus negotiations.“
Mnuchin, of course, says his intentions are pure, but that’s hard to take seriously. In his letter to Powell, he suggested that he was bound by law to wind the programs down because Congress intended the programs to end by Dec. 31; but last month, he said Treasury would consider extending them beyond that point, depending on the state of the market. He also has claimed that it’s all right to phase the programs out because they’ve already done their job—which would be more convincing if the pandemic weren’t entering a new and terrifying phase this winter. He’s also said that using the Fed’s money for other purposes would save taxpayers money, telling CNBC, “We have $500 billion to use on fiscal stimulus that won’t cost taxpayers a penny.” But that, too, is untrue: When it scored the CARES Act, the Congressional Budget Office concluded that the money used to backstop the Fed programs would effectively have zero cost to the taxpayer, because it didn’t expect the central bank to actually lose much money on its lending. Taking that cash, and actually spending it elsewhere, on the other hand, would actually add to the deficit.
What comes next is a bit murky. Of the $450 billion Congress appropriated, the Treasury Department has only committed $195 billion to the Fed’s programs so far. It’s not obvious that Mnuchin has the legal power to ask for that money back, in which case the Fed may be able to continue lending. However, it’s entirely possible that Powell will choose to return the cash in order to prevent a messy brawl with the current administration, which is the sort of thing the Fed generally tries to avoid.
The big picture, though, is that Mnuchin is attempting to kick the supports from the economy when there’s no obvious need. It’s a sad last act for one of the few sorta-decent figures in Trumpworld.