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Unsanitized: The COVID-19 Report for Nov. 20, 2020

Mnuchin Mothballs the Money Cannon, and I Feel Fine

Rhetorically he's right: slice up the money cannon and give it to
people

 

Steve Mnuchin is a carefree guy. (Evan Vucci/AP Photo)

First Response

The CARES Act's Federal Reserve lending facilities, which I've
lovingly called the money cannon, created effectively a giant bank with
up to $4.5 trillion in lending capacity. Just the pre-positioning of
those resources has been enough to keep investors satisfied that they
would not be allowed to lose money during the pandemic, which they have
not.

There were pretty strong hints that Republicans were disinterested in
continuing the money cannon after it technically expires at the end of
the year. The deadline could be extended, but Treasury would have to
agree to the terms (or maybe not; more on that in a second). And
yesterday, Steve Mnuchin pulled the plug
.

On December 31, the corporate credit facilities, along with the Main
Street Lending Program (MSLP) and the Municipal Liquidity Facility
(MLF), will end. That's $195 billion in Treasury funds that could
support close to $2 trillion in lending. (The other roughly $250 billion
that Treasury could devote to Fed programs wasn't even ever set up.)
Mnuchin even asked for the $70 billion Treasury had already given to the
Fed as part of the lending facilities, saying that it was unlikely to be
needed since the lending volume has been so miniscule.

Everyone is screaming that Mnuchin is engaging in political sabotage of
the incoming Biden administration. But that's only if you think the
goal of government is to keep financier wallets well-stocked. The money
cannon has not been employed to much useful purpose, and I just don't
believe a Biden Treasury would suddenly prod it in that direction
either. The money cannon has one use, if only rhetorically: by being
decommissioned, the government can get to the work of aiding the real
economy through the final rough patch of the pandemic.

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Mnuchin has said that the facilities "achieved their objectives,"
which in his mind was to prop up Wall Street. It's hard to argue with
his myopic viewpoint. The money cannon unstuck markets

and made a lot of people rich amid mass chaos. We are now in a different
place than we were in March. The stock market is a snapshot of the
expectations of future economic outcomes. And the hopes of a vaccine are
doing what the money cannon did, raising those expectations that the
economy will come roaring back. (Pfizer just filed for their emergency
use authorization

today.) There will be lots of winners and losers here, but if you're
just talking about the markets in aggregate, they see the pandemic's
end in sight.

The Fed is of course upset, openly disagreeing with Mnuchin in a
statement :
"The Federal Reserve 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." The problem with this is that it's not and has never been
a backstop for the economy, but a backstop for the stock market. I
suspect the Fed is angrier that there's been an imposition on their
authority.

Anyway, Mnuchin has a ready retort to the Fed's entreaty, and an
unusually populist one for the Goldman Sachs veteran: give the money
cannon to the people. "We have $500 billion to use on fiscal stimulus
that won't cost taxpayers a penny," he told CNBC today
. First of
all, it's $454 billion, and second of all, it will cost taxpayers. In
a sign that everyone pretty much knew that the money cannon was just
designed to keep money flowing on Wall Street, the Congressional Budget
Office never actually scored it as costing any money. The gains from the
lending interest would outweigh any losses absorbed by the Treasury
fund, CBO said. So there isn't a pot of money that could just go from
the money cannon to the public.

We Can't Do This Without You

Rhetorically, however, what Mnuchin's saying is completely on point
,
and should be taken up by Democratic leaders. Even the Republican
Treasury Secretary is now admitting that Wall Street has had enough
support, and it's time to give the same support to the general public
in this critical moment, as a bridge to the vaccine's eradication of
the virus.

Now, Chuck Schumer said yesterday

that staff-level talks on a coronavirus aid package have begun, the
first signal of any negotiation at all related to Mitch McConnell in
eight months. But nobody expects that the rhetorical wallop of
Mnuchin's claim will add half a trillion dollars to whatever the
Senate is cooking up. So isn't Mnuchin, as a servant to Trump, just
depriving the incoming president of an already authorized tool of Fed
lending, when it could be needed the most?

I mean... it's clear that much could be done with those facilities to
help stabilize a teetering economy, most notably by using the MLF to
prevent crippling austerity at the state and local level. (Rich states
like California with progressive tax structures have found windfalls

in their treasuries, in large part because of the Fed propping up the
stock market, so there's slightly less need there.) To a lesser
extent, the Main Street Lending Program could support small business.
It's definitely notable
that
Mnuchin wants to end the programs that could help public employees and
small businesses, now that the threat to investors has subsided.

My problem is that I don't believe the Fed would actually do anything
of value with the authority granted it. It's been eight months so far;
two MLF loans have been made, despite widespread pressure from
Democrats. The theory is that Treasury has been the roadblock all along
to lending freely or using the money cannon in any unorthodox way.
However, the Fed has plenty of authority

to aid state and local governments outside of the money cannon, without
Treasury having veto power over it. There's no reason the Fed needs
that permission slip, as Robert Hockett explains
.

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What they actually want is political cover, in the form of a Biden
Treasury Department that's more willing to push the envelope. However,
there are a lot of assumptions about that which I think are dubious.
Jerome Powell has not struck me as willing to use short-term,
endlessly-rolled-over loans to give states and localities grants that
don't have to be paid back for decades, or something similarly
generous, even if Biden's radical liberal Treasury Secretary (who, er,
won't be a radical liberal) gives the go-ahead.

We do need more support for the economy, even after the vaccine is
distributed. I agree with Dean Baker
that hopes of a
V-shaped recovery are somewhat overwritten. I just am skeptical that the
Fed would ever provide what's needed, and if you have a Republican
saying to transfer Fed authority into money for people, I say you take
him up on it.

The Fed, incidentally, could reject Treasury's request
to give
back the $195 billion. There's also about $800 billion in lending
capacity available through the Exchange Stabilization Fund; that's
about 40 times more than the Fed has lent to date. And, the programs
could be restarted three weeks after they shut
, when
Joe Biden is inaugurated. So what is this freak-out from the likes of
Jason Furman

("reckless mistake") and Paul Krugman ("effectively trying to
create a financial crisis") and economic analysts

("like stripping the Titanic of its lifeboats")?

Because these are people that wake up in the morning worrying about
whether we'll have a Goldman Sachs, not worrying whether we'll have
a middle class. Any wind-down of the entity that "calms markets" and
protects their assets is meddling with the very forces of nature. The
Fed has plenty of power without these programs, and you can argue that
fiscal policy is stuck because investors are so protected. If you want
to get people through this terrifying final stretch of the economic
crisis, you'll take up precisely Mnuchin's argument: slice up the
money cannon and give it to the people.

Days Without a Bailout Oversight Chair

238
.

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Today I Learned

* An update on yesterday's Unsanitized: the Tyson managers who bet on
their assembly line workers getting COVID have been "suspended
."
Not fired? (Wall Street Journal)

* The CDC is now recommending that people stay home for Thanksgiving
.
(Centers for Disease Control and Prevention)

* Airline bookings are starting to fall
,
suggesting that the message is hitting home. (Wall Street Journal)

* Remdesivir rejected as a therapy for COVID
by
the World Health Organization. (New York Times)

* The European surge is starting to ease amid restrictions
.
The protective measures work. (Axios)

* Brexit talks suspended after chief negotiator gets COVID
.
(Bloomberg)

* Sen. Rick Scott (R-FL) has COVID, as McConnell warns his colleagues

to stay healthy or risk not getting a bunch more judges confirmed. (NBC
News)

* The movie business is just utterly transformed
,
probably forever. (Vox)

* Greenhouse gas emissions in the COVID year down to 1983 levels
.
(Washington Post)

* Matt Taibbi finds a pandemic villain: Allianz
. (TK
News)

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