Bloomberg Businessweek - USA (2020-04-20)

◼ ECONOMICS Bloomberg Businessweek April 20, 2020

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THEBOTTOMLINE TheFederalReserve’sunprecedentedpush

intonewkindsoflending has drawn praise but also raised concerns

thattheinstitutionmight be putting its independence at risk.

ofeligibleborrowersonanemergencybasis.

Section13(3)oftheFederalReserveAct,enacted

duringtheDepression,givestheFedtheauthority

tolendtotheprivatesectorandstateandlocal

governments—though stillonly against high-

qualitycollateral—under“unusualandexigent

circumstances.”Withthedepartment’sOK,the

Fedtrundledoutthe speciallendingvehicles

thatweredevelopedforthefinancialcrisis.Their

reappearancerestoredinvestors’confidencein

sectorsoffinancethatareinvisibletothegeneral

publicbutcrucialtoBigBusiness,includingcom-

mercialpaperandrepolending.

ButthetoolkitdevelopedunderBernanke

wasn’tenough—becauseincontrastto2008-09,

whenthefinancialsystemfrozeup,thistime

almosttheentireeconomyis onice.Forthefirst

time,theFedisbuyingbondsfromandmak-

ingloansdirectlytocompanies.It’salsobuying

municipal debt; rollingout the Main Street

Lending Program for companieswith fewer

than10,000employees;andbackingtheSmall

BusinessAdministration’sPaycheckProtection

Program,whichis forcompanieswithfewerthan

500 employees.ReachingbeyondBigBusinessis

goodfortheeconomyaswellasadvantageousfor

theFed,whichhasbeencriticizedinthepastfor

helpingWallStreetmorethanMainStreet.

Thistimethecentralbankmaybeaccusedof

creatingproblemsfortheeconomyanditselfby

strayingfrommacroeconomicpolicy.Someofits

newlendingmakestheFedessentiallyanagentof

theTreasuryDepartment,raisingquestionsabout

itsindependence.UndertheDodd-FrankActthe

Fedis prohibitedfrommakinglendingdecisions

aboutindividualcompanies,butthathasn’tstopped

criticsfromaccusingit ofmicromanagement.“This

isfiscalpolicy,pickingwinnersandlosers,”says

MarkSpindel,founderandchiefinvestmentofficer

ofPotomacRiverCapitalandco-authorwithSarah

BinderofTheMythofIndependence:HowCongress

GovernstheFederalReserve.

There arealreadycomplaintsthatthe Fed

isrewardingfoolishrisk-takingbybailingout

overindebtedcompanies.A popularGIFportrays

a crazedPowellata lecternshootingouta cloud

ofdollarbillsfroma machine-gun-likeprinting

press.“I’vegottencommentsfromclientswhoare

worried about the precedent the Fed is setting,”

says Kathleen Bostjancic, chief U.S. financial econ-

omist at Oxford Economics. She’s not: “I would give

Powell an A-plus,” she says.

The Fed isn’t supposed to lose money on

its lending, which is why it ordinarily sticks

to investing in ultrasafe Treasury bonds and

government-guaranteedmortgage-backedsecu-

rities.ThegambitthatallowstheFedtolend

toweakerborrowers is a guarantee from the

TreasuryDepartmenttoabsorblosses.A fifthof

themoneyinthe$2.2trillionCoronavirusAid,

Relief,andEconomicSecurityAct—$454billion—

isearmarkedforsuch lending.TheTreasury

Departmentis beginningto putthat startup

moneyintoa rangeofspecial-purpose vehicles

that make loans. The Fed amplifies the vehi-

cles’ lending capacity eight- to tenfold by lending

money to them. The department will swallow the

losses if the borrowers don’t repay.

However, the Fed will start to lose money if the

losses exceed the amount the Treasury Department

puts in. “Given how fast our thinking about the

virus is evolving, we have to be open to that pos-

sibility—that things could be much worse than the

Fedstaffforecast,”saysJPMorganChase’sFeroli.

Intheworstcase,theFedmighthavetogoto

Congresstoaskformoremoney,whichwouldbe

a blowtoitsindependence.

Powellis likelytobecriticizedbysomefordoing

toolittleandbyothersfordoingtoomuch,justas

Bernankewasa bitmorethana decadeago;no

onecanknowforsurebecausethere’sonlyone

economytoexperimenton.

It’shead-spinningthatPowellhasgonefrom

Trump’sbêtenoiretotheonepersonmostlikely

tohelpthepresidentgaina secondterm.Trump

acknowledgedthedebtonMarch23,saying,“I

calledhimtoday,andI said,‘Jerome,goodjob.’”

However,headded,“Hewasa littlebitslowerthan

whatI’dhaveliked.”Powellalsohassupportfrom

DemocratsinCongress,whoappreciatehisrespon-

sivenesstotheirquestionsduringtheFedchair’s

semiannualtestimony,aswellashisimpassiveness

inthefaceofTrump’sinsultsanddemandsforeasy

money.There’snosensethatPowellis workingfor

thepresident’sreelection.“Peoplerealizehe’snot

Trump’serrandboy,”saysFeroli.

Bernanke,a studentofthebankfailuresofthe

GreatDepression,wastherightpersontoleadthe

Fedthroughthefinancialcrisis.Yellen,a labor

economist,waswell-placedtochairit duringthe

slowrecovery.Nowit’sPowell’schancetoshow

whethera formerinvestmentbankercansustain

business through a pandemic-induced economic

deep freeze. So far, he’s made some fans. Says

Deutsche Bank’s Slok: “It’s almost the perfect

match of having the right person at the right time.”

�Peter Coy, with Craig Torres

● Amount earmarked in

the CARES Act for new

Fed lending

$454b