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| DATE | 2020-12-20 |
| FROM | Ruben Safir
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| SUBJECT | Subject: [Hangout - NYLXS] This is worth understanding...
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wsj.com
Opinion | Hijacking the Fed to Bail Out States
The Editorial Board
5-7 minutes
Updated Dec. 17, 2020 7:49 pm ET
The U.S. Federal Reserve in Washington, D.C.
Photo: Liu Jie/Zuma Press
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The Covid relief talks drag on in Congress, with the parties more or
less agreeing to spend $900 billion more over a mere three months. But
they’re still fighting over the details, and a major obstacle is the
Democratic desire to use the Federal Reserve next year to channel tens
of billions of dollars or more to state and local governments.
The fight behind the scenes concerns the money and authority for the
Fed’s 13(3) pandemic lending facilities. Senate Republicans, led by
Pennsylvania’s Pat Toomey, want to repurpose some $429 billion in Cares
Act money to finance roughly half of the new spending. The Fed made only
$25 billion in loans and other commitments because most businesses and
municipalities could borrow more cheaply in the private market.
Fed Chairman Jerome Powell has agreed to return the unused funds to
Treasury at Secretary Steven Mnuchin’s request. Though the Cares Act
clearly called for the programs to end on Dec. 31, Democrats insist that
the Biden Treasury could revive the programs and renew lending. That’s
why Mr. Toomey also wants the bill to include language that leaves no
doubt that the programs end on Dec. 31. The Biden Treasury would then
need a new appropriation from Congress to revive the programs.
That Democrats are opposing the Toomey language gives away that their
plan is to use the Fed to go around Congress if they don’t control the
Senate next year. They’re afraid a GOP Senate won’t agree to another
spending blowout to rescue profligate states like Illinois and New
Jersey. They want to use the Fed’s municipal and state lending facility,
which was stood up this year at the height of the pandemic and market
disruption, as the bailout vehicle.
Even if the $429 billion that was turned over to Treasury is earmarked
for other Covid relief, the Fed still retains some $35 billion to $40
billion as a backstop for its special pandemic facilities. That could be
leveraged as much as 10 times to lend to states and cities at terms the
Biden Treasury and Fed would set. That’s all the more reason for
Republicans to hold firm on Mr. Toomey’s language ending the programs.
The financial markets are in good shape, unlike in March and April.
Well-managed states are finding ways to navigate through the pandemic,
and state revenues haven’t fallen nearly as much as feared. The draft
$900 billion bill also includes tens of billions in aid for states
earmarked for hospitals, vaccine distribution, protective equipment,
child care, education, broadband, food stamps, public transit and more.
All of this is a matter for fiscal policy determined by Congress. Yet
Democrats want to use the Fed as a second fiscal spigot that they can
turn on at Treasury and Fed discretion. This isn’t the proper role for
the Fed, especially when the financial emergency has passed. Illinois
and New York’s Metropolitan Transportation Authority are the only two
public entities that have borrowed from the Fed.
But if Treasury squeezes the Fed to offer conciliatory terms, or
essentially free money, many others will line up. Given the politics of
these states and cities, and their inability to reform anything in
government, the Fed could end up taking major losses on those loans.
Taxpayers would be the losers of this backdoor bailout.
Democrats are getting much of what they want in the $900 billion, which
amounts to $300 billion a month. They’ll have another chance to spend
more next year when they’ll control the House, the White House and
perhaps the Senate.
This is all the more reason for Republicans to insist on the Toomey
language as a dealbreaker in the Covid relief bill. If Democrats want to
bail out public unions in progressive states, they ought to do it
honestly through Congress. Leave the Fed out of it.
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multiple categories? Images: Getty Images Composite: Mark Kelly
Appeared in the December 18, 2020, print edition.
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