Treasury Secretary Steven Mnuchin denied Friday that by ending several emergency loan programs being run by the Federal Reserve, he was trying to limit the choices President-elect Joe Biden will have to promote an economic recovery.
Mnuchin said his decision was based on the fact the programs were not being heavily utilized. He said Congress could make better use of the money by reallocating it to support grants to small businesses and extended unemployment assistance.
“We’re not trying to hinder anything,” Mnuchin said in a CNBC interview. “We don’t need this money to buy corporate bonds. We need this money to go help small businesses that are still closed.”
However, critics saw politics at play in Mnuchin’s decision, saying the action would deprive the incoming administration of critical support the Fed might need to prop up the economy as coronavirus infections spike nationwide.
“There can be no doubt, the Trump administration and their congressional toadies are actively trying to tank the U.S economy,” Senator Sherrod Brown, D-Ohio, said in a prepared statement Friday. “For months, they have refused to take the steps necessary to support workers, small businesses and restaurants. As the result, the only tool at our disposal has been these facilities.”
Mnuchin on Thursday had written Federal Reserve Chairman Jerome Powell announcing his decision not to extend some of the Fed’s emergency loan programs, which had been operating with support from the Treasury Department. The decision will end the Fed’s corporate credit, municipal lending and Main Street Lending programs as of December 31.
The decision drew a rare rebuke from the Fed, which said in a brief statement Thursday that the central bank “would prefer that 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.”
Move ‘ties the hands”
The U.S. Chamber of Commerce also criticized the move. “A surprise termination of the Federal Reserve’s emergency liquidity program, including the Main Street Lending Program, prematurely and unnecessarily ties the hands of the incoming administration and closes the door on important liquidity options for businesses at a time when they need them most,” said Neil Bradley, the chamber’s executive vice president, in a prepared statement.
Private economists argued that Mnuchin’s decision to end five of the emergency loan facilities represented an economic risk.
“While the backstop measures have been little used so far, the deteriorating health and economic backdrop could shine a bright light on the Fed’s diminished recession-fighting arsenal and prompt an adverse market reaction,” said Gregory Daco, chief U.S. economist at Oxford Economics.
Under law, the loan facilities required the support of the Treasury Department, which serves as a backstop for the initial losses the programs might incur.
In his letter to Powell, Mnuchin said he was requesting that the Fed return to Treasury the unused funds appropriated by Congress.
He said this would allow Congress to reappropriate $455 billion to other coronavirus programs. Republicans and Democrats have been deadlocked for months on approval of another round of coronavirus support measures.
In public remarks Tuesday, Powell made clear that he hoped that the loan programs would remain in effect for the foreseeable future.
“When the right time comes, and I don’t think that time is yet, or very soon, we’ll put those tools away,” he said in an online discussion with a San Francisco business group.
The future of the Main Street and Municipal Lending programs has taken on greater importance with Biden’s victory. Many progressive economists have argued that a Democratic-led Treasury could support the Fed taking on more risk and making more loans to small and midsized businesses and cash-strapped cities under these programs. That would provide at least one avenue for the Biden administration to provide stimulus without going through Congress.
Relatively few loans
Neither program has lived up to its potential so far, with the Municipal Lending program making just one loan, while the Main Street program has made loans totaling around $4 billion, to about 400 companies.
Republicans including Senate Banking Committee Chairman Mike Crapo of Idaho and Senator Pat Toomey of Pennsylvania supported Mnuchin’s move.
“Congress’ intent was clear: These facilities were to be temporary, to provide liquidity and to cease operations by the end of 2020,” Toomey said in a statement. “With liquidity restored, they should expire, as Congress intended and the law requires, by December 31, 2020.”