WASHINGTON — While discussion continues in Washington around a new relief/stimulus package, a big question remains around why one of the big pots of money the Federal Reserve has already made available has largely gone untouched.
The stimulus package passed earlier this year included $454 billion earmarked for the Treasury to back Fed loan programs. At the time, backers said every one of those dollars could, in theory, be turned into as much as $10 in loans, noted the New York Times. Emergency powers would allow the central bank to create the money for lending; it just required that the Treasury insure against losses.
“It was a shock-and-awe moment when lawmakers gave the package a thumbs up. Yet in the months since, the planned punch has not materialized,” the Times reported.
The Treasury has allocated $195 billion to back Fed lending programs, less than half of the allotted sum. The programs supported by that insurance have made just $20 billion in loans, far less than the suggested trillions, the report added.
‘Victim of Own Success’
Why? According to the analysis, “the programs have partly fallen victim to their own success: Markets calmed as the Fed vowed to intervene, making the facilities less necessary as credit began to flow again. They have also been undercut by (Treasury Secretary Steven Mnuchin’s) fear of taking credit losses, limiting the risk the government was willing to take and excluding some would-be borrowers. And they have been restrained by reticence at the central bank, which has extended its authorities into new markets, including some — like midsize business lending — that its powers are poorly designed to serve.”
Many in Washington are now clamoring to repurpose the unused funds, an effort that has taken on more urgency as the economic recovery slows and the chances of another fiscal package remain unclear, the Times observed. The various programs are set to expire on Dec. 31 unless Mnuchin or Fed Chairman Jerome H. Powell extend them.
The Fed Has Its Limits
In late March, the Fed announced it was making plans to funnel money into a wide array of desperate hands, not just into Wall Street’s plumbing. Officials would set up an effort to lend to small and medium-size businesses, the Fed said, and another that would keep corporate bonds flowing.
Congress allocated $454 billion in support of the programs as part of the economic relief package signed into law on March 27, with the figure somewhat random and the hope being the huge dollar figure would stoke hopes among lawmakers and would-be loan recipients — ones that have been disappointed.
But as the Times observed, the Fed has its limits.
“Key markets began to mend themselves as soon as the Fed promised to step in as a backstop,” the Times reported. “Companies and local governments have been able to raise funds by selling debt to private investors at low rates.”
‘Self-Induced Obsolescence’
“While self-induced obsolescence partly explains why the programs have not been used, it’s not the whole story,” the report continued. “The Main Street program, the one meant to make loans to midsize businesses, is expected to see muted use even if conditions deteriorate again. In the program that buys state and local debt, rates are high and payback periods are shorter than many had hoped. Continued lobbying suggests that if the programs were shaped differently, more companies and governments might use them.”