What’s next for the Treasury Fed’s COVID-19 loan facilities?

Treasury Secretary Steven Mnuchin, in a November 19 statement letter Federal Reserve Chairman Jerome Powell has reduced Treasury commitments to many emergency lending facilities the Fed has created in response to the COVID-19 pandemic, including those for businesses in medium size and state and local governments.

This led to three questions: Did the law require it, as Mnuchin suggested in his letter? What can the Fed do now? And what can the Biden administration do once the president-elect is invested?

Was it required by law?

Mnuchin’s reading of the law is based on his interpretation of congressional intent rather than a legal requirement. The relevant law is § 4029 of the CARES Law, which states that “the authority provided under this subsection to make new loans, loan guarantees or other investments will end” on December 31, 2020. But CARES ‘“intended authority” rests with the Treasury, not the Fed. The power of the Fed to create these facilities comes from the Federal Reserve Act, not the CARES Act. These “new loans, loan guarantees or other investments” are those granted by the Treasury to various counterparties, including in particular the Federal Reserve. (If you don’t know why one part of the government is lending money to another part of the government, welcome to the novelty of the CARES law.)

This means that Mnuchin is correct that the Treasury can’t do New commitments after December 31, 2020. This has nothing to do with the Fed’s emergency lending authority, however. The Fed is committed to keeping these facilities open, which even Mnuchin acknowledges (as he leaves treasury money in place). In other words, the law did not oblige Mnuchin to withdraw these funds; it is a decision for which he is solely responsible.

What can the Fed do now?

Watch and wait, for now. Powell said the Fed would return the money to the Treasury. However, these facilities are still open and these significantly weakened facilities may not be needed. After all, the take-up in 2020 has so far been disappointing. Perhaps the markets, businesses, individuals and families will continue to fend for themselves without the need for the kind of experimentation we saw from the Fed earlier this year.

Fortunately, the Fed has a lot more ammunition, creativity, and bandwidth to adapt when needed, without the involvement of the Treasury.

It’s a big bet to take. Fortunately, the Fed has a lot more ammunition, creativity, and bandwidth to adapt if the need arises, without the involvement of the Treasury. In particular, it could take two paths. First, he can change his legal and technical theory of his emergency loans so that the money from the treasury is not needed. There is no requirement in law that the Treasury provide these funds to the Fed in the first place. The Federal Reserve Act need the Fed to “establish, in regulation,. . . emergency loan policies and procedures “which are” designed to ensure that. . . emergency loan collateral is sufficient to protect taxpayers from losses. Emphasis is added because the law is about what the Fed does. He proposed changes in 2013 and adopted revised changes in 2015. This part is finished.

In practice, however, the Fed might look at emergency lending theory more broadly than it has so far. Rather than relying on Treasury funds – with all the limitations these introduce, including such instability that we now see – he can look at his entire balance sheet and all of his lending facilities to engage in alone. this loan. Central bankers like to say that they are in the business of “lending, not spending”. The general proposition is true enough, but more creative loans, including riskier loans that are weighed against its other emergency monetary measures, will be more than enough to protect taxpayers from losses.

Second, the Fed could design new facilities for lending or purchasing assets using the authority of the Federal Reserve Act which does not involve the Treasury at all. These include section 14, the part of the Federal Reserve Act governing open market operations. The Fed has relied on this section for some of its other emergency programs, such as international swap lines with foreign central banks and what’s called quantitative easing. It also possesses the largely untapped potential of the “discount window», The direct loan mechanism to banks. He created a new discount window facility after 2008 to support banks, but could also use this same process to support bank customers – what they in the UK call “finance for loans”. (The Bank of England lends to banks at below market rates; the quantity and price of these funds is tied to the amount of loans made by the banks.)

At a minimum, the Fed – or perhaps Fed Chairman Powell – should declare that we are far from the end of the Fed’s ability to support the economy and the financial system in an emergency. The legal structures described above may pose technical or political obstacles, but not legal ones. If things start to fall apart, the Fed will not be short of defenses.

What should Yellen do?

The press reports that President-elect Biden will appoint Janet Yellen, the former president of the Fed, as Treasury secretary. It will undoubtedly handle the job very differently from its predecessor, especially in how it will partner with the Fed on emergency loans.

This will happen in two ways.

First, the Treasury must legally give “pre-approval” for any new facility the Fed creates under its emergency lending authority. Given that the Fed has already thrown the kitchen sink on the issues of the COVID financial crisis, it seems unnecessary. But if we’ve learned one thing from 2020, it’s that we have to be ready for anything. Therefore, if new facilities become necessary after January 2021, Treasury Yellen will have a major role to play in shaping them.

“[T]here is a solid legal argument that [Yellen] may, on January 20, bring the dial back to November 19 and undo the cancellation of Mnuchin.

Second, there is a strong legal argument that on January 20 she can bring the dial back to November 19 and overturn Mnuchin’s cancellation. This would reinstate Treasury lending under the original Fed-Treasury deal, with funds explicitly earmarked by Congress in the CARES Act for this purpose. The question is whether such a move would constitute a prohibited “new loan” or in fact simply be a restoration of the legally valid arrangement created earlier this year. The political stakes for this kind of move are serious, since many Republicans could oppose it, but it is an option to be considered carefully.

Either way, the treasury will play an important role in emergency lending no matter where it steps in. It is not a threat to the independence of the Fed that the Treasury Secretary insists that emergency loans reflect important political constraints and opportunities – it is precisely this type of collaboration that Congress has. designed to amend the Federal Reserve Act after the 2008 crisis. Elections have consequences and the new Secretary of the Treasury can and must have an impact on the direction these extraordinary government powers will take.


Author’s Note: A previous version of this article misrepresented the year the Fed passed its amendment to its regulation 13 (3). It was in 2015, not in 2014.

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