Is Trump Trying to Take the Economy Down With Him?

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Consumed by Election Day, Congress effectively abandoned the country when it failed to reach an agreement in October on a desperately needed relief bill. Now, its energy is geared toward the partisan mess of the presidential transition and two Senate runoffs in Georgia.

The result has been that the stability in the markets, as well as recovery in the broader economy and state and local governments is largely resting with the Federal Reserve — specifically its use of emergency lending tools in partnership with the Treasury to buy trillions in corporate bonds to make crisis loans to medium-size businesses and to municipalities looking to plug some extreme budget shortfalls. These emergency “facilities,” as they’re called, which were authorized by the CARES Act in spring and set to expire next month, played a major role in staving off free fall in the credit markets.

Yesterday evening Treasury Secretary Steven Mnuchin sent a shocking letter to Federal Reserve Chairman Jerome Powell, announcing that he was not going to extend the emergency programs for municipalities and medium-size businesses, a retreat which could be disastrous for major sectors of our economy, even if the stock markets focus on positive vaccine news.

Early this morning on CNBC, Mr. Mnuchin misleadingly spoke as if he were simply “following the intent of the law” by yanking this monetary aid away and he put the onus on “Congress to re-appropriate these funds,” even though widespread reporting suggests his boss, President Trump, has no interest in new deals. Tellingly, a couple of programs that help Wall Street were allowed to live on “in an abundance of caution,” as the secretary’s letter claimed.

To Chairman Powell’s credit, he and the Fed took the remarkable step of publicly disagreeing. “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy,” the central bank said in a statement.

Secretary Mnuchin’s move comes just as President-elect Joe Biden is preparing to name his own Treasury secretary, and it fits a growing pattern of Mr. Trump’s team doing everything he can to undermine and kneecap the incoming administration’s ability to crisis manage.

For those wondering how an alphabet soup of emergency financial measures that can be turned off by a lame duck cabinet member’s whim came to be so important: No, it’s not supposed to work this way. On paper, Congress should have seen that the ongoing crisis — including the roughly one million teachers and many other public workers in education who have been laid off because state and local budgets are in shambles — was getting worse, and that it required them to pass renewed direct fiscal aid.

That, of course, hasn’t happened. Still, there was hope that the Fed could make up for it by being even more aggressive about its ability to issue low-cost loans, using ample CARES Act funds and its own statutory powers.

Instead, while the Fed’s emergency loan programs to backstop the financial markets have been widely, and correctly, seen as a general success, the loan program it set up for state and local governments — the Municipal Liquidity Facility — was disappointing. Because the Fed’s municipal loans terms are so tough there were few takers.

Only two loans have been made: one to the State of Illinois and another to the Metropolitan Transportation Authority of New York for a total of $1.7 billion, which is 0.3 percent of the $500 billion Congress authorized for facilitating such loans in the CARES Act. And for the M.T.A., those loans remain inadequate, as New York City still plans to lay off subway workers and drastically cut service.

Mr. Powell has often sounded exasperated when pressed about the program this fall. He explains that private actors in the municipal bond markets are there to make the vast majority of loans, “so we,” the Fed, “only actually have to do a backstop,” which stabilizes the private rates being offered.

Then he sidesteps follow-ups, like those from Congresswoman Rashida Tlaib, which argue that those private loan terms are still seen as onerous by state and local leaders from Louisiana to California. If still pressed, he repeats, over and over, the limits of the Fed’s authority to make emergency loans (tucked under section 13(3) of the Federal Reserve Act).

This most recent news — that Secretary Mnuchin has not only been tamping down any consideration of the Fed using more boldly but now also plans to shut it down — has shown that Chairman Powell has a point. If you get into the weeds of the CARES Act, you’ll see that Congress instructed the Fed to work with the Treasury on the details of the emergency lending facilities and that the Treasury has the ultimate say.

No responsible economist wants the Fed to push past its legal authority. The last thing America needs now is another assault on our democratic institutions. But there is still much the Fed can do and prepare for in the meantime, even under pressure from the Treasury.

President-elect Biden’s pick for Treasury secretary will be much more likely to work with, not against, the Fed in more generously supporting state and local governments. Many of the prominent names being floated have already worked closely with Chairman Powell and expressed sympathy for a more aggressive use of recovery tools.

Even in his news release announcing closure of these crucial emergency programs, Secretary Mnuchin acknowledged that if “it becomes necessary in the future to reestablish any of these facilities, the Federal Reserve can request approval from the secretary of the Treasury.” Teams inside the Fed could be drawing up plans for an ambitious reboot of the facilities now.

The Fed can also hire some people who have worked on finances in a major city that has been hit hard in this crisis, like New Orleans or Detroit or Atlanta. Then, they need to listen to them. Ask them what terms or information municipalities need to use the program: a longer window of time to be able to pay back the loan or a different rate? Can’t deliver on those terms? Then, mention that to Congress, plainly and loudly, the next time you are asked to testify about the state and local budget crisis. (It won’t be long.)

The Fed may operate using cold language, but it still has a part to play in ensuring that Washington is pushed to fulfill the spirit of the CARES Act legislation, which was to help communities struggling through no fault of their own. Policy elites will parse the statutes endlessly but the broad reality is that Congress left the granular implementation of emergency programs up the Fed and the Treasury — and making a profit on the emergency loans, which some hawks are focusing on, was never a priority. In contrast, the Fed just recently reaffirmed its full employment mandate as a priority.

We have a long way to go until Inauguration Day, yet the Fed can begin to prepare itself now to act as more than a backstop. Based on the prospects for action from Congress, our states and local communities will need it.

Claudia Sahm, a contributing opinion writer, and the author of the “Sahm Rule,” an early recession signal, was a section chief in the division of consumer and community affairs at the Federal Reserve.

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