Two weeks ago, I don’t think anybody would have guessed that one of the last major conflicts holding up a deal over coronavirus aid would have somehow centered on a handful of emergency lending programs that have barely been used since the Federal Reserve christened them this year. Yet here we are.
Republicans, led by Sen. Pat Toomey of Pennsylvania, have launched a last-minute bid to permanently shut down some of the credit facilities that the central bank launched this spring in response to the pandemic—specifically, ones that allowed it to buy corporate bonds, and lend to state and local governments as well as midsized companies. Democrats—including President-elect Joe Biden’s team— have cried foul, accusing the GOP of attempting to sabotage the incoming administration with a rash demand that would permanently change the Fed’s crisis-response powers.
What’s a little odd about this whole argument is that, unlike the debates over unemployment insurance or direct cash payments to households, it’s not clear whether there are any short-term economic stakes riding on its outcome whatsoever. Nonetheless, there are some good reasons why the issue has caused such an uproar, and why Democrats in Congress are resisting conservative demands.
When the Fed created these programs, the economy was in a state of plague-induced freefall, and there was widespread concern about the stability of the credit markets. In particular, frightened investors appeared to be fleeing from corporate bonds, which was making it harder and more expensive for companies to borrow just as their revenues were evaporating. The Fed’s lending facilities—which were backstopped with money Congress set aside in the CARES Act—helped stop the run by reassuring investors that there would be a buyer of last resort for corporate debt, and pretty soon, credit was flowing again like normal. (Some progressives have groused, unconvincingly, that this amounted to a nefarious corporate bailout, but it’s not exactly clear why it would have been in the country’s best interest to let a temporary panic paralyze part of the financial system.)
In the end, the Fed itself hasn’t actually done much lending through its emergency programs. The central bank has bought only a handful of corporate bonds, while handing out money to just a smattering of municipalities. Since April, the programs have essentially been a reassuring presence available in case of a new catastrophe cropped up, a bit like a fire extinguisher sitting behind some glass. If they actually disappeared, it’s not clear anything particularly horrible would happen to the economy.
Nonetheless, Democrats—and some pundits like myself—were outraged when Treasury Secretary Steve Mnuchin announced in November that he would not extend the programs beyond the end of this year, when they’re set to expire. (Under the CARES Act, continuing them would have required his approval.) Making matters worse, Toomey and the Republicans are trying to insert language into the relief deal that would make it impossible for the Biden administration to restart them, as it could do under current law. Thus, Democrats like sens. Elizabeth Warren and Brian Schatz are throwing around charges of attempted sabotage.
So, why are Democrats mad, given that almost nobody was actually tapping these programs anyway?
First, and most obviously, Republicans are trying to take away the Fed’s fire extinguisher just as Biden is getting ready to take office, which will make it harder to respond effectively if the economy bursts into flames again (that probably won’t happen, but you never know!).
Second, even if they haven’t been used much yet, these programs still have some potential to be helpful. The reason few states or midsized businesses have borrowed from the Fed’s facilities yet is that they haven’t offered particularly generous terms. But progressives have hoped that Biden’s Treasury Department and the Fed might tweak the programs to make them more attractive sources of credit. Some have suggested that this could be a way to channel relief to states, something Republicans have largely refused to include in the relief bill. “It would be a huge missed opportunity for an incoming administration not to have some of these tools at their disposal,” Graham Steele, a Stanford Graduate School of Business professor and former Democratic Senate staffer told me. Of course, that’s a big part of why the GOP is fighting to shut these programs down: They don’t want the Fed offering an aid program to New York or Illinois via generous loans.
Last, but certainly not least, the two sides are also fighting about what the Fed’s powers should be in the longer term. This part gets a little complicated, but the upshot is that Republicans are trying to permanently revoke crisis-fighting tools that the Fed had at its disposal before the CARES Act was ever enacted.
In theory, the Federal Reserve did not need Congress’s permission to start these emergency lending programs; its Board of Governors could have done so entirely on its own using what are known as its section 13(3) powers. The only thing Congress provided in the CARES Act was extra money to absorb any losses on loans, which if necessary gave the Fed power to lend out more than it otherwise would, as well as a clear bipartisan political mandate to start the programs. What this means is that, even if the current set of emergency lending efforts were to sunset this year, Fed Chair Jerome Powell & Co. could simply start completely new versions, with or without the Treasury’s green light, if they felt so inclined.
Republicans want to cut off that ability, and they’ve introduced sweeping language to do so. The proposal they’ve put forth would ban the Fed from restarting the corporate, state, or mid-sized business lending programs, or ever creating “any program or facility that is similar” to them, no matter what the next administration wanted. That language is both vague—what does “similar” mean, exactly?—and also sweeping, in that it would forever ban the Fed from creating another new program to directly help states or moderately sized businesses. (To be extra technical and nitpicky, the central bank would still have some limited powers to buy municipal bonds under another part of the Federal Reserve Act.) That would be a major blow to progressives, who’ve hoped that the Fed could play a more active role directly helping Main Street in the future. Moreover, it would be a major, and extremely hasty, revision of the emergency lending laws Congress painstakingly hashed out when it negotiated the Dodd-Frank Act after the Great Recession. “What Senator Toomey is advocating for is a significant limitation on the Fed’s authority,“ Bharat Ramamurti, managing director of the Roosevelt Institution’s Corporate Power Program, and a Democratic member of the COVID-19 Congressional Oversight Commission, told me. “To rewrite 13(3) lending law like that on the fly seems pretty disturbing.“ The fate of the economy might not hinge on this last-minute argument. But the stakes are still plenty high.