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Mnuchin Cuts Off Emergency Lending Programs, Facing Criticism from Fed

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Mnuchin Cuts Off Emergency Lending Programs, Facing Criticism from Fed

2020-11-20 18:48:51

By Laura Tucker, Staff writer; Image: Steve Mnuchin (Image source: Screenshot)

Toward the beginning of the coronavirus pandemic, the government acted together to set some stimulus relief packages to help American individuals, families, and businesses that would be hurting with job losses and closing businesses. In the midst of the biggest virus surge so far, Treasury Secretary Steve Mnuchin has announced he would not be extending most of the emergency lending programs that are run along with the Federal Reserve. The central bank was quick to chastise the secretary for this announcement.

Mnuchin sent a letter to Fed Chair Jerome Powell stating that several of the programs attached to the Cares Act would be shutting down by the end of the year. Additionally, he requested that unspent money allocated to the Fed from the Cares Act be reallocated to Congress. The Treasury Department doesn't have the unilateral authority to do this, however, and would need an agreement from the Fed.

The Fed is not known for releasing public statements on such moves, yet Mnuchin's letter triggered one. "The Federal Reserve would prefer 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," said the Fed statement.

This move by the Treasury would end many of the Fed's emergency lending facilities as well as the Main Street lending program and the municipal liquidity facility. The programs issue loans to businesses and local governments that have hit on hard times. Also in his letter, Mnuchin requested a 90-day extension for some of the programs that are operated through the markets.

Together, the Treasury and the Fed established a set of programs toward the onset of the pandemic. The two sides have disagreed over how the programs should work and how effective they could be. Because they share responsibility, it means decisions can't be made by Powell or Mnuchin, despite the secretary just making the unilateral decision about the emergency lending programs.

Along with the Fed, Mnuchin's decision also drew quick criticism from Democrats as politically motivated and an attempt to hurt the economy before President-elect Joe Biden takes over the country. They showed concern that the Senate GOP could try to get the funding repurposed in the next stimulus package, which would decrease the amount Congress approves.

"Secretary Mnuchin is removing critical support from a weak economy against the Federal Reserve's wishes. This is economic sabotage," said Sen. Ron Wyden (D-OR), the ranking Democrat on the Senate Finance Committee, in a statement. "Secretary Mnuchin is salting the earth in an attempt to inflict political pain on President-elect Biden."

Democrats and economists also have concerns that if the programs are ended, it would eliminate protections for the markets before the recovery is complete.

The executive vice president and chief policy officer at the U.S. Chamber of Commerce, Neil Bradley, called for the programs to be extended in a statement Thursday night. He warned that "American businesses and workers are wary of these political machinations when they are doing everything in their power to keep our economy going."

The Fed hasn't shown that it was ready to end the programs. Powell said earlier this week that the Fed was committed to using all its tools "for as long as it takes until the job is well and truly done" and that "when the right time comes, and I don't think that time is yet or very soon, we will put those tools away."

Earlier this month, Powell said at a news conference that the Fed was just starting to consider questions of extending the facilities. "And in terms of the process, this is a decision we have to make and will make jointly with the Treasury Department, he said, unaware that Mnuchin would make a unilateral decision.

While the Main Street lending program and municipal liquidity program have been criticized for the burden inflicted by their loan terms and not taking advantage of what's available, Fed officials have long said it would be premature to end the support until the recovery is sustained and the economy gets through the upcoming winter.

Sen. Pat Toomey (R-PA), who may soon become chairman of the Senate Banking Committee, and other GOP lawmakers believe the emergency lending programs have served their purpose.

"These facilities, which were established in response to the unprecedented market turmoil caused by the COVID-19 pandemic earlier this year, have successfully achieved their intended purpose stabilizing credit markets so private credit could once again flow to businesses, states, and municipalities," said Toomey. "These temporary facilities helped to both normalize markets and produce record levels of liquidity." 

However, much of the money the Fed is holding for these programs has not been used. It's clear how much could be removed because of rules on how the money should be spent. The Cares Act allotted $454 billion from the Treasury Department, and only $195 billion has been committed to the losses the Fed may incur through the programs. This includes loans that companies fail to repay. The remaining $259 billion has still not been committed to any of the Fed's specific programs or for any other purpose.

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