WASHINGTON – Treasury Secretary Steven Mnuchin sharply clashed with the Federal Reserve this week, choosing to end a series of programs aimed at helping markets, businesses and municipalities go through the pandemic and asking the central bank to return the funds earmarked for to support this effort.
Sir. Mnuchin said his decision was driven by a reference to what he believed was congressional intent when it allocated the funding, a desire to redistribute the money to better uses and a belief that markets no longer needed them. But his actions, which will limit the ability of the incoming Biden administration to use these programs on a large scale, seem politically motivated.
But that view is not shared by the Fed, which quickly issued a statement expressing disappointment with the decision, calling the economy “still strained and vulnerable.” It is worth noting that Mr. Mnuchin only publicly took the position that Congress meant for the programs to end after December 31, when it became clear that President Trump had lost the election to Joseph R. Biden Jr.
By ending the programs – which have drawn loans to medium-sized companies and stopped the municipal and commercial bond markets – Mr. Mnuchin away a source of financial support, just as the new administration joins, and as rising virus cases make the recovery. By asking the Fed to return the money that enables emergency efforts, he could make it harder for Democrats to restart them on a large scale and on more generous terms.
Chairman Jerome H. Powell stated that the Fed would return the funds in a letter to Mr. Mnuchin Friday afternoon.
“It’s not just closing the store for Biden,” said Ernie Tedeschi, a policy economist at Evercore ISI. “It’s burning the store down.”
Mr. Biden’s transition team criticized the move for trying to hamper his ability to help the economy.
“The Treasury Department’s attempt to stop premature support that can be used for small businesses across the country when faced with the prospect of new shutdowns is deeply irresponsible,” Kate Bedingfield, a spokeswoman for the transition, said in a statement.
Mr. Mnuchin’s decision came as a surprise to Mr. Trump, who became aware of the decision shortly before Mr. Mnuchin’s letter was released on Thursday, and as of Friday morning, expressed some concern that the movement could have a negative impact on the stock, according to a person familiar with the matter and who was not authorized to speak in public. Asked if Mr Trump had instructed Mr Mnuchin to end the programs, Mr Mnuchin’s spokeswoman said it was “solely a Finance Ministry decision based on what the law and the intent of Congress required.”
Here’s a review of how these programs work, why Mr. Mnuchin says he kills them and why his arguments leave unanswered questions.
The programs are a collaboration.
Mr. Mnuchin is pulling the plug on a set of Fed emergency lending programs that the central bank can use to keep credit afloat in times of crisis. Following the recession of 2008, Congress insisted that the Minister of Finance sign such an action.
The Fed is disgusted by taking credit losses, so the Treasury has provided a layer of money to cover any loans or purchases that go bad. It originally used the Exchange Stabilization Fund, a pot of unused money. But in March, Congress strengthened the treasury’s capacity.
Mr. Mnuchin and lawmakers earmarked $ 454 billion to support Fed lending when they cut a deal on a government pandemic package. The Fed can make money out of thin air, and it needs only a little backing – $ 1 in insurance can be turned into as much as $ 10 in bond purchases or corporate loans. The programs offered great potential for the government.
Mr. Mnuchin eventually earmarked $ 195 billion for specific lending programs. Not much of this capacity has been used. Some programs reassure market conditions simply by reassuring investors. The program for loans to small and medium-sized enterprises had restrictive terms.
When Mr. Mnuchin said Thursday that he would end the five grant-supported programs by the end of 2020, he asked the Fed to give back all $ 25 billion he leaves to support already made loans and bond purchases.
The law is not ‘clear’, as Mr Mnuchin said.
Sir. Mnuchin has said “it is very clear in law” that the grant-supported programs should end on 31 December. It’s not true.
The law says the Treasury is not to distribute money from its $ 454 billion pot by the end of 2020 – but it does allow already dedicated funds to remain available. Because the Treasury had handed over hundreds of billions of dollars in insurance money to the Fed, the central bank theoretically has a lot of capacity left to take out loans and buy bonds.
Fed lawyers have interpreted the law so that they can keep the programs running in 2021, supported by the existing Ministry of Finance, as the central bank’s statement on Thursday suggested.
Mr. Mnuchin himself had previously suggested that the programs could be extended after the end of the year, writing in a letter from October that the decision would depend on market conditions.
A Treasury spokeswoman said on Friday that Mr Mnuchin had always believed that Congress was intended to finance the sunset and had planned to use the Exchange Stabilization Fund money – plus the $ 25 billion he leaves with the Fed to cover existing loans. to expand applications if necessary.
This logic is difficult to follow given Mr Mnuchin’s belief that the law prevents new Fed lending backed by congressional money after 31 December. If so, it should also prevent new lending against the $ 25 billion coming from the same congressional pot. , said Peter Conti-Brown, an attorney and Fed historian at the University of Pennsylvania.
Congress cannot reuse the money for free.
Sir. Mnuchin also suggested that the withdrawal of the earmarked money would allow Congress to redirect it to other purposes in ways that “will not cost taxpayers more money.”
But the Congressional Budget Office estimated the budgetary impact of the money dedicated to Fed programs to be almost free. The idea was that the loans the money backed up would eventually be returned and fees and interest income would cover any expenses. So if the money is scratched back and re-entered into expenses – not lending – it would add to the deficit for accounting purposes.
Market distortion has always been a problem.
Top Republicans have suggested that letting the programs run for too long can distort markets, which is a real concern with such backstops. In his letter, in which he announced that he intended to close the programs, Mr. Mnuchin that normal market conditions prevail.
It is true that the issuance of corporate bonds has been rapid and states and localities are able to finance themselves at low interest rates. But virus cases are also poignant, suggesting conditions could worsen and Fed backstops may be needed again.
During the summer, Mr. Mnuchin in extending the programs until December 31st at a time when coronavirus infections were much lower than they are today, markets were functioning well, and companies were issuing bonds at breakneck speed.
Democrats say the movement was political. Republicans welcome it.
The Treasury’s move to get the funding back limits Mr. Biden. The Fed and the next Treasury Secretary can use the Exchange Stabilization Fund to back up bond purchases and corporate loans.
But it contains far less money than the government would have had with the congressional grant. It could hamper a goal that had been pervasive among Democrats: to restart the programs, make them more generous, and use them as a backup option if additional stimulus was difficult to get through Congress.
Kentucky Sen. Mitch McConnell, the majority leader, said the request to end the programs and return the money was “entirely in accordance with the letter of the law and the intent of Congress.”
Democrats responded with revolt.
“Clearly, Trump and Mnuchin are willing to destroy the economy and make it as difficult as possible for the future Biden administration to reverse this crisis and lead the nation to a recovery,” California Rep. Maxine Waters said in a letter. .
Jim Tankersley contributed reporting.