Unsanitized: How the Federal Reserve’s Thumb is on the Bailout Scale

Also, updates on Social Security and debt collectors. This is The COVID-19 Daily Report for July 24, 2020.

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Days Without a Bailout Oversight Chair

119, and that’s actually today’s lead story. Four months ago Democrats inserted accountability and oversight provisions into the CARES Act, saying that they would aggressively track how money is being spent, particularly the money cannon constructed at the Federal Reserve. Four months later, there’s nobody chairing the main oversight entity, the Congressional Oversight Commission (COC). Yet the commission is still doing its work, putting out its third report this week, and planning a hearing on one of the Fed’s credit facilities, the Main Street Lending Program.

The finding in the third report was kind of interesting, and it reminded me of another milestone this week: the 10th anniversary of Dodd-Frank. That legislation was really more of a suggestion to regulators to change their rules, with some vague and discretionary guidelines for how to do it. The regulators really had the power to shape Dodd-Frank, as we see with the Trump administration undermining it without having to change a word.

The CARES Act gave similar discretion to the Fed and the Treasury Department, as Bharat Ramamurti, one of four commissioners on the COC, explained to me. And that means that Jerome Powell and Steven Mnuchin have tremendous power to shape the crisis response. They’re using it to benefit large corporations and not smaller rivals or state and local governments.

Read all of our Unsanitized reports

At the core of this is an unanswered question about the purpose of the CARES Act money cannon. “Is the goal of these programs to correct the problems that existed in the market and bring them back to what they were before, or to further subsidize these companies or state and local governments because we’re in the middle of the crisis?” asked Ramamurti in an interview. There seems to be a disparity in how that question is being answered, depending on the beneficiary.

For example, the corporate bond market is not just being backstopped. There’s a clear subsidy being granted, where the cost of borrowing is now cheaper than it was. The Fed is buying corporate bonds, despite a stabilized market, and the commission is wondering why. Powell told Congress last month that the Fed had to “maintain its credibility” by delivering on the promise to buy up bonds.

In other markets, however, promises aren’t being kept. The “Main Street Lending Program,” intended to cover companies too big for a small business PPP loan and too small to participate in corporate bond markets, has essentially been non-functional. As of July 15 it’s made exactly one $12 million loan. This too was a promise, to sustain these types of businesses. When asked about it by the commission, Powell and Mnuchin said that lack of utilization is not necessarily bad, it just means the market is working as it should and there’s no need to intervene.

“That’s an inconsistent approach,” Ramamurti said. The Fed is intervening in large corporate debt markets because it allegedly has to, but not intervening in smaller lending markets. Similarly, the Fed isn’t doing much lending in the Municipal Liquidity Facility (MLF), despite dire needs in state and local governments. So the biggest corporations are benefiting from a subsidy while everyone else is subject to the whims of the market.

A bigger problem is that Congress appropriated $500 billion to these facilities, but didn’t say whether they wanted that actually spent or just used to backstop lending. That matters, because it affects the terms by which the loans are given. “Riskier” lending in this case would mean that more companies, including those on the edge, could benefit. “I wish Congress had been more clear about it,” Ramamurti said. The relevant section of the CARES Act only says that the Fed is authorized to address liquidity problems arising from COVID-19. “It left the Treasury and the Fed a lot of discretion to how to make that determination.”

The Fed could actually figure this out. It already can execute emergency lending without losing much money. “If you add this money on top, they’re saying, ‘we’re giving you this money to take on more risk,’” Ramamurti explained. But that standard is being applied differently depending on the recipient. “I just think that the program has not delivered for smaller companies and state and local governments.”

Ramamurti said that the commission has actually operated decently without a chair. To me, the lack of a chair creates an informal limitation, in the signal it gives to the political system. Any entity operating without a chair for so long is not seen as a priority. Obviously there aren’t a lot of people out there on which Pelosi and McConnell would agree; this was easier in 2008 when Democrats had unified control of Congress and could choose an Elizabeth Warren to do oversight. But Democrats knew that going in and could have placed some requirements in the law to get a chair seated.

The key feature of a chair, Ramamurti maintained, is a background of conducting robust oversight. Staff can assist on working knowledge of Federal Reserve programs, he said. But knowing how to procure documents, and a commitment to fighting the bureaucracy to get them, is of paramount importance. I think I’d rather have someone with a passing interest in the technical details. If Pelosi and McConnell continue to dither, however, Ramamurti believes that there’s still value in the four-member commission.

“We got bipartisan agreement [in the report],” he said, citing agreements over the MLF and the Main Street program. “That’s a valuable thing that Congress seizes upon. We are getting through to our intended audience a little bit.”

Updates

We haven’t actually seen the Republican crisis response bill yet, but Mitch McConnell did confirm that the TRUST Act is part of the base package. As I reported yesterday, the TRUST Act, written by Mitt Romney, is a vehicle to guarantee a fast-track vote to cut Medicare and Social Security, circumventing normal Congressional rules. The idea that you would even think about deficit reduction in the middle of this crisis is appalling. And if followed through, these cuts would likely kick in during the next presidential term, with both parties on the hook for slashing grandma’s Social Security check, just the way McConnell wants it. This bears watching. (If Republicans ever release a bill that is.)

Also, a better update: remember that story I wrote about how private debt collectors, including banks, can grab stimulus checks? Sen. Sherrod Brown (D-OH) and others wrote a bill to prevent such thievery by encoding CARES Act payments as federal benefits that cannot be garnished or used to offset existing debts. That bill passed the Senate yesterday, by voice vote. The CARES Act payments are out the door, but this will become the standard for any other payments, and there is another round expected in the next bill. “The House must immediately take up this bill and ensure that the money allocated to working families by Congress goes to pay for food, medicine, and other necessities, not to debt collectors,” Brown said in a statement.

Odds and Sods

I was on Your Call with Rose Aguilar on KALW radio in San Francisco talking about small business and the pandemic. Listen here.

Last chance to register for today’s Prospect Zoom event at 1pm ET, where Zach Carter, HuffPost writer and author of The Price of Peace, the New York Times bestseller about the life of John Maynard Keynes, and I will ask each other questions about our books. (Mine is called Monopolized, but you know that already.) This should be really fun. You can register here to participate in the event live.

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