Notice & Comment

Needed Clarity on the Treasury’s $500 billion

            The Federal Reserve, Treasury, and Congress are working furiously to address the financial, fiscal, and macroeconomic consequences of the coronavirus crisis of 2020. We will debate the appropriate lines between monetary, fiscal, and emergency financial policy in the months and years ahead, but right now it is very important to have as much clarity as possible about what, exactly, government officials are trying to accomplish.

            One hotbed of ambiguity and uncertainty is about the so-called $500 billion Treasury “slush fund” that is included in the current compromise bill. I put “slush fund” in quotation marks, because it is an epithet used by critics, a claim that became more credible when President Trump insisted that no oversight was needed because “I’ll be the oversight.”

            The statutory language as drafted is indeed legally ambiguous, but only partly so. In this post, I’ll identify the ambiguity, discuss a problematic policy choice, and advise a tweak to make sure the public has much more clarity on what is envisioned in this Treasury-Fed partnership. Unfortunately, the current text is not available online, so bear with me. I also recognize that this is a fast-evolving bill.

First, the legal ambiguity. The relevant provision is Section 4003, “Emergency Relief and Taxpayer Protections.” That provision permits the Secretary of the Treasury “to make loans, loan guarantees, and other investments in support of eligible businesses, States, and municipalities that do not, in aggregate, exceed” $500 billion.  There are restrictions, though, and they are fast-evolving, gelling on a conception that this $500 billion fund will be administered jointly by the Fed and Treasury. In Section 4003(b), Congress outlines how the loans will be made. There are strings attached, in other words, including $50 billion for airlines, $8 billion for cargo air carriers, and more. The biggest slug of financing—$425 billion, plus anything not used from the other $75 billion—“shall be available to make loans, loan guarantees to, and other investments in, programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States, or municipalities”.

            In the restrictive “terms and conditions” section of the statute, however—Section 4003(c)(3)—the statute, under the heading “Federal Reserve Programs or Facilities,” outlines more restrictions. The ambiguity arises in these two different descriptors. In the first, it supports “programs” or “facilities established” by the Fed. That might also be read as “programs or facilities established” by the Fed. Given the heading “Federal Reserve Programs or Facilities” used elsewhere, the proposed language probably envisions the second reading. It should be made consistent throughout–one reading would create a Treasury slush fund and the other a Treasury-Fed partnership.

Second, the policy choices. There are two policy choices that I think are problematic. First, the statute restricts use of the Treasury’s funds to “loans, loan guarantees to, and other investments in” the Fed facilities (if, again, the Fed’s facilities are the target). This is a big restriction and makes the Treasury the reactive entity to the Fed’s establishment of lending facilities. An alternative approach would be to write that these loans, guarantees, and investments be “part of” Fed facilities. This would preserve some freedom of movement that wouldn’t lock in the 2008 model–which, so far, is the 2020 model–of creating a facility by the Fed to target an asset class (which would then, new in 2020, have Treasury come along for part of the ride). I think preserving more flexibility to have the Treasury create and the Fed support new programs is a better one.

A second policy choice is the provision in 4003(c)(3)(B) that states simply that “the principal amount of any obligation issued by an eligible [entity] under a [Fed facility] shall not be reduced through loan forgiveness.” I think this is a mistake. There is zero moral hazard in this crisis. The indebtedness that these businesses, states, and municipalities are incurring is not likely to be fully made up or amoritized for a very, very long time. The reason to take on debt through Fed facilities is to weather this storm and soften the massive blow that the cessation of all physical contact has meant to the macroeconomy. Treasury and Fed should have the authority, together, to forgive these loans in a principled way after the dust settles.

Third, administrative procedure. There is so much left to be determined, including on the nature of these facilities and what will become of them. We need more guidance from the Fed and Treasury than we are getting, including especially on how this newly envisioned Treasury-Fed Accord will be structured. Because to be very clear, we haven’t seen anything like this before, with such substantial participation in emergency lending by both Treasury and Fed.

I think it’s a very useful innovation. But we need to know a lot more about it. Congress should add to Section 4003 a requirement that Treasury and the Fed issue guidance to establish broad principles about how these funds will be deployed. They can update that guidance; it need not be subject to notice and comment. But this should not be deployed ad hoc.