Senate Republicans have proposed giving the Federal Reserve access to $425 billion in funding that it could use to extend emergency support to flailing businesses or struggling localities — an approach that would keep central bankers at the center of the coronavirus economic response in ways that could prove politically fraught.
Republican lawmakers proposed increasing a Treasury Department fund that would be used to cover losses on the Fed’s emergency lending programs as part of a sweeping government rescue package. While their effort to advance the bill failed on Sunday evening, it is likely a template for what lawmakers will eventually approve.
Republicans view the Fed as a key player in offsetting the economic havoc being wrought by the coronavirus. That is partly because the Fed can take a limited amount of funds and deploy them widely: The central bank only needs the funds as a guarantee against losses, meaning the $425 billion could be leveraged to support far bigger programs. Treasury Secretary Steven Mnuchin on Sunday seemed to suggest that the backstops could amount to $4 trillion.
“We can lever up to $4 trillion to help everything from small business to big business get through the next 90 to 120 days as we win this war,” he said on Fox News.
But Democrats on Sunday expressed dismay at the prospect of doling out money without a clear road map for how the funds might be used. Their opposition added a chapter to the emergency lending program’s history of political controversy.
During the 2008 financial crisis, the Fed used its emergency lending powers to inject money into Bear Stearns and American International Group, which were on the verge of collapse. The programs drew such intense and bipartisan political backlash that Congress, in the 2010 Dodd-Frank law, stripped the central bank of the ability to bail out specific institutions. Emergency programs must now be broadly available, meaning they could be tapped by five or more institutions.
“Making politically unpopular decisions for the long-run benefit of the country is the reason the Fed exists as a politically independent central bank,” Ben S. Bernanke, who was the Fed chair at the time, wrote in his memoir. “It was created for precisely this purpose: to do what must be done — what others cannot or will not do.”
Economists have speculated that this time the Fed could snap up corporate debt or local bonds using its emergency lending powers in a bid to calm dysfunctional markets, if it is given sufficient backing by the Treasury. Neither of those efforts has been tried before by the Fed and it remains unclear how such a program might work.
“One of the options, I think, is clearly that they could buy corporate debt and municipal debt,” Ernie Tedeschi, policy economist at Evercore ISI, said of the language in the Republican bill, which nods at supporting credit provision to “eligible businesses, states, or municipalities.”
Analysts have also been on the lookout for a revival of a crisis-era program that the Fed used to support lending to households and small businesses. That program was called the Term Asset-Backed Securities Loan Facility, or TALF.
The Fed’s 2020 programs will likely be less specific than the firm-specific ones it used during the Great Recession, which could shield the central bank from some criticism this time around. Mr. Mnuchin himself emphasized that the Fed-tied programs will be “broad-based.”
The legislation would have given Mr. Mnuchin $75 billion to use in loans, loan guarantees and other investments in specific industries — including air carriers and national security-related businesses — but that would be separate from the Fed-related portion.
Peter Conti-Brown, a Fed historian and lawyer at the University of Pennsylvania’s Wharton School, warned that it was crucial for the Fed avoid helping specific industries.
The Fed has a “convenient set of easy tools that allow policymakers and politicians to skip the burden of their own accountability,” he said. “It’s the kind of set the Fed does not want to make today — which is to pick winners and losers.”
Fed officials have already started unveiling emergency lending programs, and so far, they have been fairly broad. Over the course of the past week, they have moved to shore up the market for short-term loans businesses use to fund day-to-day operations and acting to prevent a run on money market mutual funds, a type of popular investment vehicle.
The central bank is not legally able to take on much credit risk, so Treasury has backed those moves by pledging money from its Exchange Stabilization Fund to cover losses. That fund currently has around $94 billion in it, so the new legislation would dramatically ramp up the Fed’s options when it comes to establishing future lending programs.
A Treasury spokeswoman did not respond to a request for comment on how Mr. Mnuchin arrived at the $4 trillion figure, but Michael Feroli at J.P. Morgan said that the assumption implicit in the figure — that the Treasury would guarantee the first 12 percent of losses of any program backed by the funding — was probably reasonable.
Whether a source of emergency program funding will be approved is now an open question.
During the 2008 financial crisis, Congress gave the Treasury Department $700 billion to buy troubled assets, a small portion of which was used to back emergency lending programs at the Fed.
Scott Minerd, the chief investment officer of Guggenheim Investments, said the government appeared poised to revive such a program, though it appeared reluctant to use terms associated with unpopular 2008 efforts, such as the Troubled Asset Relief Program, or TARP, which authorized bank bailouts.
“I think they’re trying to stay away from using words like TALF and TARP because of the political implications,” Mr. Minerd said.
Mr. Minerd said that while a large program would most likely be necessary, the size of the fund under consideration would probably not be sufficient.
“The number of companies and industries lining up looking for largess is mind numbing,” he said.