US economy

It is too soon to shut down US pandemic lending programmes

The writer is an emeritus Harvard Law School professor and directs the Committee on Capital Markets Regulation

Last week, the US Treasury Secretary Steven Mnuchin ordered Federal Reserve chairman Jay Powell to shut down several emergency lending programmes by the end of the year, withdrawing funding that had supported the markets and Main Street through the pandemic

That decision, communicated in a November 19 letter, is poor public policy because it limits the central bank’s ability to provide additional support to the economy and to protect financial markets as the recovery proceeds.

If Mr Mnuchin will not back down from his demand that the central bank close the facilities, incoming president Joe Biden and Janet Yellen, his choice to replace Mr Mnuchin at Treasury, should ask the Fed not to comply. That would free up Ms Yellen to make use of the facilities if she deems it necessary.

Mr Mnuchin’s resort to unilateral action is an extraordinary and historic economic confrontation. The Fed had repeatedly said that these facilities, authorised by the Cares Act, should remain in place past the end of the year, and it did not add its name to Mr Mnuchin’s statement about the facilities, as would be customary.

While the Treasury secretary clearly has the authority to terminate the facilities, he was not compelled to do so. The Cares Act had set a year-end deadline for the secretary to make new investments in the Fed facilities.

Mr Mnuchin does not have the authority to tell the Fed to return around $77bn of the $102.5bn the Treasury has so far contributed. While the Fed diplomatically acceded to this request, it did not acknowledge this authority. Once that money is returned to the Treasury, its use is restricted. That means the new administration could not tap it without further authorisation of the incoming Congress. 

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Mr Mnuchin’s letter does hold out the possibility of using backing from the Exchange Stabilization Fund, if economic conditions warranted. That programme was created by Congress in 1934 to stabilise the value of the US dollar. Back in 2008, the then Treasury secretary, Hank Paulson, used ESF funds to guarantee wobbling money market funds, but Congress has since precluded their use for such purpose. If Ms Yellen did try to use ESF money, she would no doubt face legal questions or even congressional claims of illegality. So Mr Mnuchin’s reliance on these funds in an emergency may be illusory.

This action is a serious mistake. Small and medium-sized businesses continue to experience significant declines in revenue, increased default rates and tighter credit conditions. To date, the Fed’s Main Street facility has only made $5.4bn in loans as against a cap of $600bn. The low take up, as Glenn Hubbard and I have argued repeatedly, is due to the unwillingness of the Treasury to take credit risk.

If the Fed were to buy 100 per cent of these loans from the banks, rather than the 95 per cent now specified, and make their terms more favourable by reducing interest rates from 3 to 1 per cent and extending the maturities from five to 10 years, Main Street businesses could get the support they badly need.

This needed adjustment will now not be possible because of Mr Mnuchin’s unilateral action.

A successful Main Street facility would be a big plus for the economy. The new administration should be allowed to decide whether to use Cares Act funds for such a purpose. There is time for Mr Mnuchin to withdraw his letter before the end of the year. If he does not, the Biden administration should ask the Fed not to comply. Removing precautionary support available for small and midsized businesses, a crucial part of our economy, puts many at risk of unnecessary failure.

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Glenn Hubbard, a Columbia economics professor and former chairman of the US Council of Economic Advisers, also contributed.


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