When I was in graduate school studying economics, the term “quantitative easing” had not yet been invented. At that time, monetary policy tools of the fed were largely confined to establishing reserve requirements for banks, setting the discount rate at which banks could borrow from the Fed as the lender of last resort, and open market transactions by which the Fed could affect the money supply by buying and selling US government securities. At various points, Federal Reserve policy tended to be guided by targeting the rate of growth of the money supply; and at other times, it seemed to be targeting the level of interest rates. Regardless of which approach prevailed, however, the Fed was guided by its dual missions of seeking to achieve maximum employment with price stability.
Following the financial crisis in 2008, the Fed dramatically expanded the kinds of securities it would buy and sell in its open market transactions to include a range of security issues, including mortgage-backed securities and debt issued by Fannie Mae and Freddy Mac. Despite this broadening of the acceptable asset classes by which monetary policy could be conducted, the basic policy prescriptions were unaffected — i.e., “monetary easing” as expansionary policy to spur growth and employment and “monetary tightening” to combat inflationary pressures. With the greater volume of acceptable transaction markets, the Fed simply gave itself expanded discretion and flexibility to intervene with greater precision.
Separate and apart from the aforementioned quantitative easing, another innovation of the Fed authorized by the CARES Act was the institution of special purpose vehicles (SPVs) that have permitted the Fed to acquire an even broader set of assets, including corporate debt, municipal debt, syndicated loans, and even exchange traded funds. These activities were authorized and funded by congress, independently from other Fed activities.
It’s the use of the special purpose vehicles that Senator Toomey (R- PA) wants to terminate. At this time, this idea is about as wrong-headed and ill-considered as any that I can imagine. In fact, we should do the opposite. We should expand the authority of the Fed to operate under these SPVs.
Toomey, himself, released a press release with the following statement: “These facilities, which were established in response to the unprecedented market turmoil caused by the COVID-19 pandemic earlier this year, have been extremely successful in achieving their intended purpose of stabilizing credit markets so businesses, states, and municipalities could access private capital.”
If it was a successful program, why terminate it? To that, Toomey responds, “With the CARES Act, Congress demonstrated a willingness to act swiftly to address the financial fallout from the pandemic. If a critical need arises again in the future for these facilities, Congress can once again take action to revive them.” Really? The timeline relating to the negotiations for the coming round of Covid aid is testimony to Congress’s capacity to “act swiftly.” For this statement to come from one with direct experience with Congressional decision making would be laughable if it weren’t such a transparent lie.
Both monetary and fiscal policy suffer from the fact that they are subject to a lag between the time a need is recognized and the time a remedy can be affected. Having these SPV facilities funded and in place serves to mitigate this time lag problem.
Toomey’s posture seems mean spirited on two levels. First, any effort that diminishes credit availability in today’s environment will simply add to the difficulties that cash-strapped companies are currently facing, undoubtedly forcing a greater volume of companies to fail; and second, clawing back the funds that have not yet been spent by the SPVs will restrict the capacity of the Fed to act quickly and expeditiously when prompt action is most appropriate. It would unnecessarily tie the hands of policy makers in the coming administration and make it harder for it to achieve its policy objectives.
This second consideration seems to be validated by the unanimity of partisan support for this initiative. Although Toomey has been spearheading this effort to terminate these lending facilities, he’s joined by the full complement of Republican member of the Senate Banking Committee, including Senators Mike Crapo (ID), Tom Cotton (AR.), Kevin Cramer (ND), John Kennedy (LA), Martha McSally (AZ), Jerry Moran (KS), David Perdue (GA), Mike Rounds (SD), Ben Sasse (NB), Tim Scott (SC), Richard Shelby (AL), and Thom Tillis (NC). This effort appears to be yet one more example of Republicans putting party over country, with the primary objective of throwing as much sand in the gears of the coming administration as possible.