66 Finance & economics The EconomistNovember 28th 2020
A
s covid-19 spread across America, its
fiscal and monetary tsars donned their
masks, bumped elbows and presented a
united front. Jerome Powell, the chairman
of the Federal Reserve, slashed interest
rates and bought Treasuries and mortgage
debt. Steve Mnuchin, the treasury secre-
tary, pushed through a stimulus package
worth $2.2trn that increased the generosity
of unemployment benefits and secured
funding for the Fed to support firms and
market participants in need.
This partnership seemed to fracture on
November 19th, when Mr Mnuchin wrote
to Mr Powell to say that he would let several
of the Fed’s emergency lending schemes
expire on December 31st. He asked for Trea-
sury funds that had been allocated to the
Fed, as capital to support these pro-
grammes, to be returned.
Mr Mnuchin’s decision earned a rare re-
buke from the Fed, which said that it
“would prefer that the full suite of emer-
gency facilities...continue to serve their
important role as a backstop for our still-
strained and vulnerable economy”. Just a
few weeks earlier Mr Powell had said the
pair were working on an extension. On No-
vember 20th, though, he acquiesced to Mr
Mnuchin’s request. The Treasury had allo-
cated $195bn in capital to support the Fed’s
programmes, half of which had been trans-
ferred to the central bank. The Fed will now
return $70bn, keeping $25bn for loans it
has already made.
Mr Mnuchin pointed out that the pro-
grammes that would cease—including fa-
cilities to buy corporate and municipal
bonds, and those that make direct loans to
firms—were under-used and seemed to
have served their purpose. The Fed could
have made up to $2trn-worth of loans; in-
stead it lent just $25bn. The schemes were
intended to quell market dysfunction; cor-
porate-credit and municipal spreads on
Treasuries have since normalised, and
companies have been able to issue plenty
of debt.
Emergency-lending schemes can act as
a sort of insurance, even if they are not
widely used. Indeed the mere announce-
ment of the schemes in the spring served to
kick-start credit markets, even before any-
thing had been bought. But capital markets
seemed to broadly endorse the idea that the
Fed’s emergency lending schemes were no
longer needed. Stockmarket futures and
bond yields dipped a little, as Mr Mnu-chin’sletterwaspublished,butbothhad
recoveredby theend of theday.Credit
spreadsdidnotwiden.
WhatmightexplainMrMnuchin’sac-
tions?Withgovernment-borrowingyields
nearall-timelows,thecostofallocating
capitaltotheFed’sfacilitiesissmall.But
thepoliticalcostsmayhavebeenhigher.
WhenMrMnuchinandMrPowelltestified
toCongressinSeptember,nofewerthan
sevenrepresentativesquizzedthemabout
thepoortake-upoftheMainStreetLending
facility,whichmakesloanstofirms.
MrMnuchin hassuggested directing
someofthefundstootherschemes,such
asthePaycheckProtectionProgramme,a
vehicle that lends to small businesses,
whichranoutoffundsinAugust.Perhaps
hehopesthatpromisingsupportforsmall
firmswillswayRepublicansreluctantto
approveanotherstimuluspackage.Aless
charitableexplanationisthathewantsto
obstructthenextadministration.There-
turnedcashwillgototheTreasury’sGen-
eralFund,whichwillrequirelegislationif
it istobetapped.IfJanetYellen,President-
electBiden’schoicefortreasurysecretary,
wantstouseit,shewillhavetosecurethe
votesfirst. 7NEW YORK
Jerome Powell and Steve Mnuchin are
at odds over emergency lendingStimulus in AmericaA clash over cash
D
ebt-collectionvideos have become a
popular subgenre on Chinese clip-
sharing platforms. Many feature young
men deftly fielding phone calls from
aggressive collectors. Some portray the
abuses—hair pulling, slapping—that have
come to define a business that has long
gone largely unregulated in China. The re-
sult has been a Wild West for collections.
Debt collectors sometimes impersonate
police officers; the details of debtors’
friends and family are sold so that they can
be harassed. A swift rise in personal debt,
though, is forcing regulators to act.
Between 2015 and 2019 the stock of
household debt in China rose by about
$4.6trn, close to the $5.1trn accrued by
Americans over a similar period before the
global financial crisis of 2007-09, accord-
ing to data from Rhodium Group, a con-
sulting firm. The outstanding balance of
delinquent consumer receivables could
reach nearly 3.3trn yuan ($500bn) next
year, up from just 1trn yuan in 2015, reckons
iResearch, another consultancy.
In June the southern city of Shenzhen
drafted the country’s first personal bank-ruptcy law. Courts routinely heard disputes
between lenders and borrowers, but al-
lowed only creditors to file suits. The new
law, to be rolled out next year, will offer
debtors more protection against creditors.
A few other cities are conducting similar
experiments, though “these reforms are
still very limited,” says Li Jiao of Buren, a
law firm.
The central bank, meanwhile, issued
draft rules late last year, threatening to
punish banks for working with dodgy debt
collectors, though it softened the language
before the guidelines took effect on No-
vember 1st this year. Government pressure,
say industry executives, has prompted
consolidation. Some companies, such as
yxAsset Recovery, have banned in-person
visits and operate only call centres—a prac-
tice considered less intrusive. yx, which
had more than 10,000 agents last year, has
sworn off practices including selling debt-
or information, impersonating govern-
ment officials, and threatening violence.
Yet the early reforms do not quite hit the
mark. They have helped control debt col-
lection for banks, but it is online lenders
and microloan companies that pose a big-
ger risk. Delinquency rates have climbed
above 30% this year at many nonbank lend-
ers, compared to 5% for banks. Most online
lenders are not targeted by the new rules
and tend to hire local collections agencies
that pursue aggressive, often-illegal tactics
for recovering debts.
Nor has the shift away from in-person
visits eliminated debtor harassment. Phys-
ical threats seem to be being replaced by
mediated forms of “emotional pressure”,
applied during frequent phone calls, says
Tom McDonald of the University of Hong
Kong. Those seeking advice on how to deal
with officious agents need look no further
than the growing archive of debt-collec-
tion videos available online. 7HONG KONG
Bad debts lead to even worse behaviourPersonal debt in ChinaOverdue action