Mnuchin cuts off Fed’s emergency aid programs

U.S. Treasury Secretary Steven Mnuchin has instructed the Federal Reserve to close down its emergency lending facilities and return unused money designed to support small- and medium-sized businesses and state and local governments, with the Fed countering that such a move would be a huge mistake. Yahoo Finance’s Brian Cheung and former member of the Fed’s Board of Governors Randall Kroszner discuss.

Video Transcript

- Randy, thanks so much for joining us this morning. I'd love to get your thoughts on what we saw from Treasury and from the Fed yesterday and how you understood the news. Are you concerned by this kind of exchange of letters, or to you is it pro forma and makes sense at this point in the proceedings?

RANDALL KROSZNER: Well, this is sort of a new world. This is really the first time since the reforms that followed the global financial crisis-- the so-called Dodd-Frank reforms, that required signoff from the Treasury Department in order for the Fed to undertake emergency lending programs-- this was really the first time that we've seen that. And this is sort of the first time that we've seen now a difference of points of view.

Certainly, when these programs were started, Congress provided money to the Treasury and directed the Treasury to backstop these programs. The Fed went ahead and did that. Now, of course, there are different points of view on whether the program should continue. But because of the way the Dodd-Frank Act is set up, if the Treasury says no, the Fed can't continue them.

BRIAN CHEUNG: Hey, Randy, it's Brian Cheung here. I wanted to ask you about what the Fed's options are here. So it is my understanding that they had to work together to set these facilities up. But with the Fed statement yesterday, it does seem like they're at a crossroads here. Does the Federal Reserve have to return the money, the $195 billion of the $454 billion that were already allocated to its existing facilities, or are they legally binded by the Treasury's statement here to return that money?

RANDALL KROSZNER: So I'm not sure what the legal requirements are-- specifically, the requirements. But I would think that, regardless of what the legal requirements are, they should do so because the Treasury has requested for them to do so. The Congress had given the money to the Treasury and gave the discretion to the Treasury on the extent of the programs. And so the Treasury has decided that they want to wind those programs down. It then, I think, would be the Fed's obligation to make that repayment.

- Randy, do you think this development is the type of situation that causes financial conditions to tighten and causes a major risk off move in asset markets?

RANDALL KROSZNER: I don't know if this in and of itself is going to do that because, as you mentioned earlier, these programs-- or at least the ones that Secretary Mnuchin has talked about winding down-- those have not grown very large. Some of the other programs-- and those other programs are ones that had been stood up when I was there a little bit more than a decade ago that are providing support for the money markets-- those are still continuing, and the secretary said those should continue for at least another 90 days. And so it's not like everything is being pulled back.

And the biggest thing that the Fed is doing is doing asset purchases, and that's not affected by any of this.

JARED BLIKRE: Jared Blikre here. Just wanted to follow up on some of the mechanics of all of this. I was reading some headlines coming from a Mnuchin interview just minutes ago. He says he wants Congress to reappropriate the money and that he wants to spend the money on small business PPP loan. I look at the Treasury general account balance at the Fed. Its $1.5 trillion. Is this really necessary? Is there-- is it possible there's something else going on behind the scenes in terms of where they want this shuffling to go and what can they exactly do by-- accomplish by doing this?

RANDALL KROSZNER: Well, I think the-- from what you've just reported to me, so I haven't heard what the secretary has said, but from what you just reported to me, it suggests that he has a different priority now and would like to funnel more money into the Payroll Protection Plan. And in order to do that, I believe he would need the direction of Congress in order to have that-- in order to have that happen. So it's sort of a change of priorities given the change in circumstances of where we are relative to March, April.

- And Randy, you mentioned some of the facilities that you were part of setting up, you know, back during the financial crisis. So maybe we could just finish by zooming out and take stock of what has happened in the last nine months and whether you've been pleased by the effectiveness of, you know, the Fed's ability to act quickly and with size to stabilize the economy and margin, if that should give folks confidence in future crises that the Fed's mandate enables it to do what it needs to do to assist the economy in those kinds of instances.

RANDALL KROSZNER: I think that's right, and actually the passage of the Dodd-Frank act, which pulled some of the ability of the Fed to do certain things back from just being a Fed decision to being a joint Treasury and Fed decision, there had been concerns that the Fed would not be able to act quickly and boldly. Well, obviously, you go back to March, in a matter of days what took us quite a few weeks to create these new programs that-- so we had sort of pioneered them-- they set them up, and they brought interest rates down to-- effectively to zero very, very quickly.

So the good part was that, for at least many of the programs-- like asset purchases and interest rates-- the Fed could act quickly and boldly and did regardless of the changes that came with Dodd-Frank. These specific lending programs they were also able to move very rapidly and even more boldly because of money coming from Congress. But now this is one of the challenges, that once you have Congress and Treasury directing the Fed to do certain things, they can continue to direct them to do certain things or not do certain things rather than being a Fed decision.

So this is gonna be very interesting to play out over time and thinking about the Fed's independence, the Fed's crisis response. But the basic, the key responses, being to buy assets, reduce interest rates, they're able to act boldly on that and continue to do so.