Over the last week there have been plenty of articles outlining just how inadequate the latest round of stimulus is, given the turmoil millions of Americans have endured over the last nine months. While I agree it’s embarrassing our leaders think a $600 stimulus check is sufficient assistance for those who have been adversely affected by the Covid-19 economic slowdown, I’m not here to belabor that point. We all know the bill was laughable.
What’s really sadistic, though, is how certain Republicans in Congress used the relief bill to slip in language that limits the tools the Federal Reserve can use to support our already fragile economy, forcing the entire Congressional body to swallow new Fed restrictions or vote against financial relief altogether.
In the “Consolidated Appropriations Act, 2021,” nestled deep on page 541, the bill calls for the termination of various Fed lending facilities starting January 1—facilities that served as a backstop to widespread corporate defaults and municipal downgrades which, had the market been left to its own devices, certainly would have taken place. Going forward, any such programs will require Congressional approval if the Fed wants them reinstated.
There are a couple serious issues here. First, markets typically don’t alert Congress before they collapse. If downward market pressure presents a threat to smooth economic functioning, we really don’t have to time wait for Congress to assemble. Debating differing opinions and hearing lectures about moral hazard and the dangers of nationalization isn’t a prudent course of action when markets are failing. We need to stop the bleeding, and during an economic crisis, the Fed is the best equipped surgeon. Anyone can look back to 2008 and see just how well markets performed when Congress dragged its feet debating whether it should bail out Wall Street.
Second, almost everyone—even those with little to no economic background—knows how important the Fed’s efforts have been to our economy over these past ten months. Our economy has relied on central bank action to an unimaginable degree, even more than what those at the Fed think is appropriate. But the reason this is the case—the reason our central bankers have been a persistent presence in nearly every asset class—is because Congress has neglected its role as a fiscal steward: in essence, using fiscal policy to stimulate economic activity during recessions. Had Congress earlier this year, or last week during bill negotiations, been willing to pass the appropriate level of public sector stimulus rather than being concerned about the optics of trillion-dollar price tags, the Fed would have more policy space to work with and likely wouldn’t need to support our capital markets to the extent they have. Even though aid has cost trillions, most economists agree that the amount Congress allocated is insufficient for what our economy requires right now. We should commend the actions taken by the Federal Reserve Board and recognize that they have shouldered many of the economic responsibilities Congress has neglected.
So why, then, is Congress trying to limit the Fed’s policy discretion if the Fed is the only institution willing and able to intervene when the economy turns south?
Well, I would be remiss if I made it seem as though everyone in Congress favors limiting Fed autonomy. That certainly isn’t the case. These actions are largely the result of a select few ideologues, led by staunch conservative Pat Toomey, who performed a bit of political math and calculated that few in Congress would vote against a relief bill with additional Fed restrictions. So why not play a game of chicken to get what you want, right?
Senator Toomey views the lending facilities set up earlier this year as the federal government crowding out private industry (particularly the Wall Street banks that have supported him), and because he is a free-market believer, government intervention—any government intervention—is anathema to all he holds true. He thinks the market is the solution to our current predicament, and if we would only allow it time to clear, there would be little need for these government backed facilities. The problem with that, though, is had the Fed not intervened in the various capital markets, providing necessary liquidity, backstopping the free-fall of municipal debt and corporate debt, and serving as an emergency funding facility to main street businesses, we would be in much more depressing circumstances. Think back to 2008 when repo markets and interbank lending froze, threatening the future of even the healthiest companies because they couldn’t access cash to fund their operations. We really don’t want to relive that—or any variant of that—whether its corporate debt, main street lending, or municipal funding.
My point is that it takes a special sort of hypocrite to do what Toomey did to the Covid relief bill, all the while saying President Trump “will be remembered for chaos and misery and erratic behavior” if he didn't sign it. But if any of the aforementioned markets freeze—as they did in 2008—and the Fed no longer has the authority to step in and help, that will be the real chaos and misery.