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The stunning function of the Fed in stimulus talks was defined

Just as it seemed like Congress might finally reach an agreement on a new stimulus package, there was a new and unexpected fold: some Republicans suddenly found that they were really concerned about a handful of Federal Reserve emergency loan programs that most Americans are likely to be have never heard of it. And they have told the Democrats that there will be no deal unless these programs stop.

The problem arises after months of back and forth and under great time pressure. Republicans and Democrats focused on a $ 900 billion deal this week to help boost the economy while the Covid-19 pandemic rages on, and they planned to add the deal to government spending legislation passed by Sunday evening must be turned off in order to evade a government.

Both sides made some concessions in the bill – Democrats let go of aid to state and local governments, and Republicans dropped their demand for corporate liability protection (which would ensure companies couldn't be sued over coronavirus-related issues). While there were still a few issues to be resolved – what to do about unemployment benefits and stimulus measures, for example – it seemed like a breakthrough could finally be made. And yet.

Senator Pat Toomey (R-PA) leads a Republican push to try to curb some of the Fed's ability to intervene in the economy through loan programs for small business and state and local governments. In particular, Toomey says he wants to dismantle emergency loan programs that were created back in March by the CARES law. In addition, provisions should be included in this new legislation that would prevent the Fed from restarting these programs – or creating similar programs.

Toomey's argument is that the Fed, which has taken extraordinary measures to stimulate the economy during the pandemic, is at risk of becoming a "first resort" rather than a "last resort" lender. how it should be when its powers are expanded.

Democrats, on the other hand, cry badly, arguing that this has nothing to do with companies and governments turning to the Fed, and that the effort is in fact an effort by Republicans to curtail the economic tools available to President-elect Joe Biden before he even takes office.

"After weeks of refusing to recognize Biden's victory, some Republicans have decided that sabotaging his presidency is more important than helping our economy recover," said Senator Elizabeth Warren (D-MA) in one Statement on Friday. "Proposals to sabotage President Biden and our nation's economy are ruthless, wrong, and have no place in this legislation."

And Democrats are also concerned that if the language for new Fed limits is too broad in the final legislation, it would severely weaken the Fed's ability to provide emergency lending in times of economic stress. Toomey insists that the language is targeted and that there are concerns about its wider impact – – both in terms of future crises and in terms of Biden's presidency – are exaggerated.

The situation is a little strange. Republicans have been absolutely opposed to support from state and local governments throughout the pandemic, and this seems in part to be a way of ensuring that the Biden administration doesn't find a workaround to get money through the Fed.

At the same time, the CARES Act programs in question haven't worked very well so far – local governments haven't really picked up on what the Fed put down. Democrats say the programs could be upgraded to work better under a Biden government, and therefore could be used by more potential borrowers: essentially, that they are not a panacea but not worth trying.

According to former Federal Reserve economist Claudia Sahm, Democrats may be overly optimistic about how effective the programs could be going forward.

"These programs had the potential to work better than Trump, at least in a Biden administration," said Sahm, "but without more authority from Congress they would never do what the Democrats wanted."

The Fed is supposed to be there when things are really bad

In the midst of the Great Depression in 1932, Congress authorized the Federal Reserve to provide direct credit in emergencies. What this basically means is that at big moments of the economic crisis, you want the central bank to be there to make sure the markets don't get too cluttered.

The Fed grants these loans under Section 13 (3) of the Federal Reserve Act. In the aftermath of the 2008-2009 financial crisis, Congress set some restrictions on the Fed's emergency lending powers in the 2010 Dodd-Frank Act, including requiring the central bank to lend through the Treasury.

When the Covid-19 pandemic hit, Congress passed $ 454 billion through the CARES Act to the Treasury Department to stop emergency loan programs, including one for midsize businesses and one for municipalities.

Much of that money was not used, and in November Treasury Secretary Steven Mnuchin asked the Fed to return it at the end of the year. Fed Chairman Jerome Powell agreed to return the money, albeit reluctantly.

As Politico's Victoria Guida pointed out on Twitter, Toomey, a long-time skeptic of the Fed's power, wants to ensure that the CARES-related loan programs are permanently terminated as he and other Republicans fear that Democrats are giving companies "overly generous loans" grant cities and states. Republicans want to make sure the programs end now to prevent incoming Treasury Secretary Janet Yellen (assuming she has confirmed this) from using any other means to restart the programs.

The problem here is exactly what the language Toomey describes would do. Blocking new emergency loan programs for small businesses and municipalities will be bad for these potential loan recipients, but it would just leave them in a similar position to what they are now. The terms of the loans were not generous enough that many states and corporations were willing to take them out, although Democrats argue that under Biden this could be fixed.

The bigger concern, however, is that this could affect the Fed's ability to exercise its broad emergency powers and cause real, permanent damage to the central bank and its role in fighting the economic downturn.

Former Fed chairman Ben Bernanke issued a statement over the weekend warning of the potential impact of the GOP proposal. He stressed that it is “important” that the Fed “can react promptly to harmful disruptions in the credit markets” and that this ability is not restricted. "The relief bill should at least ensure that the Federal Reserve's emergency lending agencies, as they stood before the CARES bill, remain fully intact and available to respond to future crises."

The concern is that the Fed will have to ask Congress every time Toomey's proposals are too comprehensive if it wants to respond to emergency lending in times of crisis.

A Toomey spokesman said in an email that the senator does not want to change the way the Fed works in general – – However, he wants to ensure that the credit facilities established under the CARES Act will be liquidated by the end of 2020 and that no copycat facilities can be created. The spokesman said that a speech by the Pennsylvania Republican in the Senate on Saturday "makes it clear that the intent of this language is narrow and does not constitute a comprehensive rewrite of Section 13 (3) as some have suggested."

However, as Jordan Weissmann of Slate points out, the Republicans want to prevent the Fed from restarting loan programs that are "similar" to those of the CARES law. What exactly "similar" means is where the problem lies.

"If your language is very muddy, it can either mean you have a very wide-ranging interpretation or you have a very narrow interpretation," said Sahm. And if the definition of "similar" is too broad, it could dangerously bring the Fed to its knees.

“These emergency facilities, which are responsible for issuing emergency loans, are more important than monetary policy than banking regulations. This is what the Fed is doing, it is what we absolutely must have, ”she said. "These are the core powers of the Fed. So if you take this away, you are really crippling the Fed."

"The risk is that the Fed's ability to exercise its emergency powers and support the economy in the next crisis will be severely affected," Roberto Perli, partner at Cornerstone Macro, told Bloomberg. "If I were the Fed, I would strongly oppose it."

This is kind of a hostage situation with the Fed

The American people need help, and they need help now. Millions are at risk of eviction in January, millions are unemployed and millions are hungry. Congress has the power to change that, and it must do it. It's not clear what the really good faith argument is why curbing the Fed's emergency loan programs during the pandemic is worth mass homelessness or preventing people from accessing basic needs.

On the face of it, however, this is an attempt by the Republicans to limit Biden's business opportunities when he takes office. In particular, in the event that Congress doesn't take action – which has basically not been the case since March – you want the Fed to have all the tools in the toolbox. And it is reasonable to assume that Congressional inaction in the Biden administration will continue, making the Fed an even more important part of the recovery.

It is true that many states and corporations have not rushed to get loans from the Fed, but it must be argued that this is not really the point: just knowing that the Fed is there as a last resort The lender makes sense to build confidence in the economy and keep financial markets moving. The Fed, just saying it would buy corporate bonds, kept the corporate bond market moving in the spring.

The fear that the Fed would help Biden bring money to state and local governments is strange. Many in the GOP seem to believe that budget constraints are just a blue state problem and therefore have little inclination to do anything to help, or in this case, seem damned out to block potential help. Democrat-run states are absolutely not the only ones facing a decline in tax revenues, but lawmakers also want to care about all Americans, not just those who politically ally with them.

"It's clear that the Republicans in Congress and the administration don't want to give money to state and local governments," Sahm said. Why Republicans would be willing to violate their own states in order to violate democratic ones is far less clear.

The argument that the Fed needs to rely more on Congress to get approval for emergency loan programs is hard to swallow in the face of events this year. It was good in March that the Treasury and the Fed were able to work quickly together to really turn on emergency systems and take other market stabilizing measures. Imagine going through Congress, which just got by on a two-day bill to fund government, because it can't meet a deadline that comes at the same time every year.

And if Republicans really want to reform 13 (3) powers, as lawmakers did for Dodd-Frank, it doesn't seem ideal to do so hastily. "Rewriting 13 (3) lending laws on the fly seems rather worrying," Bharat Ramamurti, a member of the Congressional oversight committee that oversees the funds of the CARES Act, told Slate. On Twitter, he pointed out that the current position of the GOP appears to be a radical evolution of its previous stance: In the fall stimulus negotiations, Republicans attempted to end the current CARES bill lending programs without permanently relieving the Fed from these powers to free.

Of course, there is no way of knowing intent here. Perhaps this is another GOP-led effort to fuel stimulus. Maybe Republicans just can't stand the aid of states. Maybe they really want to tie Biden's hands. Or maybe Toomey really believes this is his only attempt at reforming the Fed, and he's taking it.

But time is running out – a deal (or an extension) has to be closed before midnight Sunday to avoid a government shutdown – and is an arbitrary solution to the supposed problem that wasn't even on the radar a few weeks ago Americans don't need a roadblock.

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