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Fear of Risk Could Diminish the Economic Rescue by the Treasury and Fed Fear of Risk Could Diminish the Economic Rescue by the Treasury and Fed
(7 days later)
As the United States plunges into the worst economic downturn in decades, there is growing concern that the Federal Reserve and the Treasury are being too timid and halting in their approach as they scramble to rescue the economy.As the United States plunges into the worst economic downturn in decades, there is growing concern that the Federal Reserve and the Treasury are being too timid and halting in their approach as they scramble to rescue the economy.
On Monday, a report from the congressional commission overseeing the Fed and Treasury’s efforts pointed out that most of the $500 billion that Congress allocated in March to the Treasury to support businesses and local governments had yet to be used and raised questions about how the rescue programs would work. The Treasury Department has yet to extend any of the $46 billion it was given to support airlines and national security-related companies and the Fed, whose newer and riskier lending programs are meant to be backstopped with the remaining $454 billion, has just one such program underway.On Monday, a report from the congressional commission overseeing the Fed and Treasury’s efforts pointed out that most of the $500 billion that Congress allocated in March to the Treasury to support businesses and local governments had yet to be used and raised questions about how the rescue programs would work. The Treasury Department has yet to extend any of the $46 billion it was given to support airlines and national security-related companies and the Fed, whose newer and riskier lending programs are meant to be backstopped with the remaining $454 billion, has just one such program underway.
While the bipartisan report was more questioning than critical, it comes as lawmakers and economists are beginning to suggest that the two policymakers at the helm of saving the economy, Treasury Secretary Steven Mnuchin and the Fed chair, Jerome H. Powell, may be proceeding too cautiously.While the bipartisan report was more questioning than critical, it comes as lawmakers and economists are beginning to suggest that the two policymakers at the helm of saving the economy, Treasury Secretary Steven Mnuchin and the Fed chair, Jerome H. Powell, may be proceeding too cautiously.
Mr. Mnuchin and Mr. Powell have been given buckets of money to gird the economy as the coronavirus lockdowns continue, tanking revenues and heightening the risk of long-term economic damage. When the pandemic eventually recedes, the trajectory of the recovery will largely depend on whether the federal government went to the necessary lengths to keep businesses and households afloat.Mr. Mnuchin and Mr. Powell have been given buckets of money to gird the economy as the coronavirus lockdowns continue, tanking revenues and heightening the risk of long-term economic damage. When the pandemic eventually recedes, the trajectory of the recovery will largely depend on whether the federal government went to the necessary lengths to keep businesses and households afloat.
Mr. Mnuchin has resisted taking on too much risk, mindful of the optics involved in bailing out large companies or those already heavily indebted. He has said he does not expect to lose the money that Congress has handed him to support emergency lending, which could be driving the Fed to be more cautious. While Mr. Mnuchin has said the Treasury could take losses if the economy worsens, his base case scenario is that it will return all $454 billion.Mr. Mnuchin has resisted taking on too much risk, mindful of the optics involved in bailing out large companies or those already heavily indebted. He has said he does not expect to lose the money that Congress has handed him to support emergency lending, which could be driving the Fed to be more cautious. While Mr. Mnuchin has said the Treasury could take losses if the economy worsens, his base case scenario is that it will return all $454 billion.
“I think it’s pretty clear if Congress wanted me to lose all of the money, that money would have been designed as subsidies and grants as opposed to credit support,” Mr. Mnuchin told reporters in late April.“I think it’s pretty clear if Congress wanted me to lose all of the money, that money would have been designed as subsidies and grants as opposed to credit support,” Mr. Mnuchin told reporters in late April.
“There’s plenty of scenarios where we lose all of our money,” he said. “There also could be scenarios where the world turns out better and we make money.”“There’s plenty of scenarios where we lose all of our money,” he said. “There also could be scenarios where the world turns out better and we make money.”
The Treasury’s desire to recoup its investment may seem fiscally prudent, but economists and former government officials say it could limit the Fed’s ability to get credit to places where it is needed, undermining the recovery. The money Congress has given the Treasury is intended to provide a layer of insurance, ensuring that the Fed is not on the hook if a loan goes bad and that the Treasury will cover any losses. If the programs were expected to lose money as a base case, they might be able to extend loans to riskier borrowers, comfortable with the reality that some would probably default.The Treasury’s desire to recoup its investment may seem fiscally prudent, but economists and former government officials say it could limit the Fed’s ability to get credit to places where it is needed, undermining the recovery. The money Congress has given the Treasury is intended to provide a layer of insurance, ensuring that the Fed is not on the hook if a loan goes bad and that the Treasury will cover any losses. If the programs were expected to lose money as a base case, they might be able to extend loans to riskier borrowers, comfortable with the reality that some would probably default.
Lawmakers have begun warning the Fed and Treasury that they may fall short of congressional intent by being too risk averse and designing programs that could exclude borrowers in desperate need of help.Lawmakers have begun warning the Fed and Treasury that they may fall short of congressional intent by being too risk averse and designing programs that could exclude borrowers in desperate need of help.
“It was always my intention, and I think the intention of my colleagues, that the Treasury would inevitably take some losses on that capital,” said Senator Patrick J. Toomey, Republican of Pennsylvania. Mr. Toomey, in an interview, said that “no losses at all” would probably suggest that the programs were not reaching enough companies, though he was “hoping that losses are smaller rather than larger.”“It was always my intention, and I think the intention of my colleagues, that the Treasury would inevitably take some losses on that capital,” said Senator Patrick J. Toomey, Republican of Pennsylvania. Mr. Toomey, in an interview, said that “no losses at all” would probably suggest that the programs were not reaching enough companies, though he was “hoping that losses are smaller rather than larger.”
Senator Mark Warner, Democrat of Virginia, suggested the Fed and Treasury needed to act more aggressively to ensure that companies can make it through the dry spell.Senator Mark Warner, Democrat of Virginia, suggested the Fed and Treasury needed to act more aggressively to ensure that companies can make it through the dry spell.
“When it comes to helping Main Street businesses, we should err on the side of doing a little too much, rather than doing too little,” he said.“When it comes to helping Main Street businesses, we should err on the side of doing a little too much, rather than doing too little,” he said.
Whether the Treasury and the Fed are being assertive enough will be front and center on Tuesday, when Mr. Mnuchin and Mr. Powell testify before the Senate Banking Committee on the programs for the first time. Mr. Warner plans to ask about the degree of risk being taken, and in a letter sent to Mr. Mnuchin and Mr. Powell on Monday, he argued that “all taxpayers will be better off to the extent more businesses can access affordable financing.”Whether the Treasury and the Fed are being assertive enough will be front and center on Tuesday, when Mr. Mnuchin and Mr. Powell testify before the Senate Banking Committee on the programs for the first time. Mr. Warner plans to ask about the degree of risk being taken, and in a letter sent to Mr. Mnuchin and Mr. Powell on Monday, he argued that “all taxpayers will be better off to the extent more businesses can access affordable financing.”
Mr. Toomey said he expected questions to arise about the time it had taken to roll out key programs. “I’m starting to get a little concerned about that,” he said.Mr. Toomey said he expected questions to arise about the time it had taken to roll out key programs. “I’m starting to get a little concerned about that,” he said.
For his part, Mr. Powell plans to explain the Fed’s actions to save the economy — which have gone beyond even its 2008 crisis response — and to reiterate that while the central bank will keep moving, it needs continued help from other parts of the government.For his part, Mr. Powell plans to explain the Fed’s actions to save the economy — which have gone beyond even its 2008 crisis response — and to reiterate that while the central bank will keep moving, it needs continued help from other parts of the government.
The Fed is “committed to using our full range of tools to support the economy in this challenging time even as we recognize that these actions are only a part of a broader public-sector response,” he said in prepared remarks.The Fed is “committed to using our full range of tools to support the economy in this challenging time even as we recognize that these actions are only a part of a broader public-sector response,” he said in prepared remarks.
The Fed has already gotten several lending programs not backed by congressional money fully set up, but of the five that use funding from the March stimulus law, known as the CARES Act, only one is partially running. The rest are in various design phases as officials try to make sure they can get credit to companies and local governments that need it without violating the law or risking excessive losses.The Fed has already gotten several lending programs not backed by congressional money fully set up, but of the five that use funding from the March stimulus law, known as the CARES Act, only one is partially running. The rest are in various design phases as officials try to make sure they can get credit to companies and local governments that need it without violating the law or risking excessive losses.
When asked why they are not pushing further with Congress’s appropriation, Fed officials have consistently pointed to the Treasury.When asked why they are not pushing further with Congress’s appropriation, Fed officials have consistently pointed to the Treasury.
“I do think we’re clearly moving into areas where there is more risk than there has been in the past,” Mr. Powell said at his April news conference. “But in terms of the way to think about that money, I think that’s really a question for the Treasury Department.”“I do think we’re clearly moving into areas where there is more risk than there has been in the past,” Mr. Powell said at his April news conference. “But in terms of the way to think about that money, I think that’s really a question for the Treasury Department.”
The Fed and Treasury have sometimes clashed over the details of program design, with some at the central bank pushing for greater risk-taking, though they have agreed on the overall purpose and on which sectors, be it the municipal loan market or corporate credit, need a program.The Fed and Treasury have sometimes clashed over the details of program design, with some at the central bank pushing for greater risk-taking, though they have agreed on the overall purpose and on which sectors, be it the municipal loan market or corporate credit, need a program.
The Treasury has pushed back on the idea that it is being too cautious. Mr. Mnuchin thinks that if the Fed were to take on more risk, it would insist on having even more financial backing. He has been holding about half of the funds in reserve as he assesses the economic effects of the programs rolled out so far — and keeping some powder dry in case the downturn becomes more dire.The Treasury has pushed back on the idea that it is being too cautious. Mr. Mnuchin thinks that if the Fed were to take on more risk, it would insist on having even more financial backing. He has been holding about half of the funds in reserve as he assesses the economic effects of the programs rolled out so far — and keeping some powder dry in case the downturn becomes more dire.
In testimony prepared for delivery on Tuesday, Mr. Mnuchin said Treasury had “committed up to $195 billion in credit support under the CARES Act. We have the remaining $259 billion to create or expand programs as needed, as we continue to monitor a variety of economic sectors closely.”In testimony prepared for delivery on Tuesday, Mr. Mnuchin said Treasury had “committed up to $195 billion in credit support under the CARES Act. We have the remaining $259 billion to create or expand programs as needed, as we continue to monitor a variety of economic sectors closely.”
“He clearly got this money, Congress said ‘you can risk this money,’ and he hasn’t done it. Why is he holding back?” said Hal Scott, the director of the nonprofit Committee on Capital Markets Regulation, who has written opinion pieces calling the approach into question with R. Glenn Hubbard, a Republican economist at Columbia University.“He clearly got this money, Congress said ‘you can risk this money,’ and he hasn’t done it. Why is he holding back?” said Hal Scott, the director of the nonprofit Committee on Capital Markets Regulation, who has written opinion pieces calling the approach into question with R. Glenn Hubbard, a Republican economist at Columbia University.
Mr. Mnuchin’s decision to limit risk seems to be informed partly by precedent. He has viewed the 2008 emergency lending programs rolled out during the financial crisis, which returned all of Congress’s money, as instructive.Mr. Mnuchin’s decision to limit risk seems to be informed partly by precedent. He has viewed the 2008 emergency lending programs rolled out during the financial crisis, which returned all of Congress’s money, as instructive.
Updated July 7, 2020
The coronavirus can stay aloft for hours in tiny droplets in stagnant air, infecting people as they inhale, mounting scientific evidence suggests. This risk is highest in crowded indoor spaces with poor ventilation, and may help explain super-spreading events reported in meatpacking plants, churches and restaurants. It’s unclear how often the virus is spread via these tiny droplets, or aerosols, compared with larger droplets that are expelled when a sick person coughs or sneezes, or transmitted through contact with contaminated surfaces, said Linsey Marr, an aerosol expert at Virginia Tech. Aerosols are released even when a person without symptoms exhales, talks or sings, according to Dr. Marr and more than 200 other experts, who have outlined the evidence in an open letter to the World Health Organization.
Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days.
Scientists around the country have tried to identify everyday materials that do a good job of filtering microscopic particles. In recent tests, HEPA furnace filters scored high, as did vacuum cleaner bags, fabric similar to flannel pajamas and those of 600-count pillowcases. Other materials tested included layered coffee filters and scarves and bandannas. These scored lower, but still captured a small percentage of particles.
A commentary published this month on the website of the British Journal of Sports Medicine points out that covering your face during exercise “comes with issues of potential breathing restriction and discomfort” and requires “balancing benefits versus possible adverse events.” Masks do alter exercise, says Cedric X. Bryant, the president and chief science officer of the American Council on Exercise, a nonprofit organization that funds exercise research and certifies fitness professionals. “In my personal experience,” he says, “heart rates are higher at the same relative intensity when you wear a mask.” Some people also could experience lightheadedness during familiar workouts while masked, says Len Kravitz, a professor of exercise science at the University of New Mexico.
The steroid, dexamethasone, is the first treatment shown to reduce mortality in severely ill patients, according to scientists in Britain. The drug appears to reduce inflammation caused by the immune system, protecting the tissues. In the study, dexamethasone reduced deaths of patients on ventilators by one-third, and deaths of patients on oxygen by one-fifth.
The coronavirus emergency relief package gives many American workers paid leave if they need to take time off because of the virus. It gives qualified workers two weeks of paid sick leave if they are ill, quarantined or seeking diagnosis or preventive care for coronavirus, or if they are caring for sick family members. It gives 12 weeks of paid leave to people caring for children whose schools are closed or whose child care provider is unavailable because of the coronavirus. It is the first time the United States has had widespread federally mandated paid leave, and includes people who don’t typically get such benefits, like part-time and gig economy workers. But the measure excludes at least half of private-sector workers, including those at the country’s largest employers, and gives small employers significant leeway to deny leave.
So far, the evidence seems to show it does. A widely cited paper published in April suggests that people are most infectious about two days before the onset of coronavirus symptoms and estimated that 44 percent of new infections were a result of transmission from people who were not yet showing symptoms. Recently, a top expert at the World Health Organization stated that transmission of the coronavirus by people who did not have symptoms was “very rare,” but she later walked back that statement.
Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks.
A study by European scientists is the first to document a strong statistical link between genetic variations and Covid-19, the illness caused by the coronavirus. Having Type A blood was linked to a 50 percent increase in the likelihood that a patient would need to get oxygen or to go on a ventilator, according to the new study.
If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.)
If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others.
But the architect of those programs, former Treasury Secretary Henry M. Paulson Jr., said that recouping the bailout funds should not be the primary motivation.But the architect of those programs, former Treasury Secretary Henry M. Paulson Jr., said that recouping the bailout funds should not be the primary motivation.
“The objective now shouldn’t be on whether we get our money back,” Mr. Paulson said. “The objective should be to minimize the number of insolvencies and bankruptcies and the economic hardship the American people are going to suffer before we can get people back to work and leading somewhat normal lives.”“The objective now shouldn’t be on whether we get our money back,” Mr. Paulson said. “The objective should be to minimize the number of insolvencies and bankruptcies and the economic hardship the American people are going to suffer before we can get people back to work and leading somewhat normal lives.”
Mr. Paulson, who speaks with Mr. Mnuchin regularly, said the fact that no money was lost on the 2008 programs was a welcome development, “but the measure of success was our ability to avoid catastrophe.”Mr. Paulson, who speaks with Mr. Mnuchin regularly, said the fact that no money was lost on the 2008 programs was a welcome development, “but the measure of success was our ability to avoid catastrophe.”
Most of the scrutiny has been aimed at a Fed program that will extend loans through banks to midsize businesses, which have diverse needs and lack credit ratings, unlike their bigger corporate counterparts, making their risk extremely difficult to assess. To limit its exposure to bad loans, the Fed has imposed restrictions, which include requiring banks to retain a slice of all loans extended and a solid chunk — 15 percent — of riskier ones.Most of the scrutiny has been aimed at a Fed program that will extend loans through banks to midsize businesses, which have diverse needs and lack credit ratings, unlike their bigger corporate counterparts, making their risk extremely difficult to assess. To limit its exposure to bad loans, the Fed has imposed restrictions, which include requiring banks to retain a slice of all loans extended and a solid chunk — 15 percent — of riskier ones.
Those limitations have prompted criticism that the Fed and Treasury, in trying to protect their capital, could fail to avert a wave of bankruptcies and layoffs. If companies fail to qualify or find the terms too onerous, they might choose to lay off workers instead of borrowing.Those limitations have prompted criticism that the Fed and Treasury, in trying to protect their capital, could fail to avert a wave of bankruptcies and layoffs. If companies fail to qualify or find the terms too onerous, they might choose to lay off workers instead of borrowing.
“The terms are not going to induce a sufficient mix of lenders and borrowers to participate,” Mr. Hubbard said. “The original sin there is the unwillingness to take losses.”“The terms are not going to induce a sufficient mix of lenders and borrowers to participate,” Mr. Hubbard said. “The original sin there is the unwillingness to take losses.”
To be fair, it is hard to say what the ideal amount of risk-taking would look like. The programs offer loans, not grants, so the money needs to be paid back. Handing them out to fragile companies could serve to increase those firms’ debt without ensuring their survival.To be fair, it is hard to say what the ideal amount of risk-taking would look like. The programs offer loans, not grants, so the money needs to be paid back. Handing them out to fragile companies could serve to increase those firms’ debt without ensuring their survival.
“If you are willing to take more risk, you will reach more firms who can survive,” said Nellie Liang, a former central bank official who is now at the Brookings Institution. But the program would also take on more firms that will ultimately fail.“If you are willing to take more risk, you will reach more firms who can survive,” said Nellie Liang, a former central bank official who is now at the Brookings Institution. But the program would also take on more firms that will ultimately fail.
“The goal isn’t to get as much money out as possible because some firms won’t benefit from a loan they cannot repay,” she said.“The goal isn’t to get as much money out as possible because some firms won’t benefit from a loan they cannot repay,” she said.
The program details are politically fraught for the Fed and Treasury. The midsize business sector is broad, and some Democrats have objected to an early revision of program terms, suggesting that they are a giveaway to the oil industry. They have also warned against bailouts for troubled companies.The program details are politically fraught for the Fed and Treasury. The midsize business sector is broad, and some Democrats have objected to an early revision of program terms, suggesting that they are a giveaway to the oil industry. They have also warned against bailouts for troubled companies.
“The Federal Reserve must only lend to businesses that need loans due to the pandemic,” Senator Sherrod Brown, the committee’s top Democrat, said in a letter Monday.“The Federal Reserve must only lend to businesses that need loans due to the pandemic,” Senator Sherrod Brown, the committee’s top Democrat, said in a letter Monday.
Politics are also playing a role. A former Trump administration official who speaks to staff at the Fed and Treasury said the Treasury Department had been concerned with the optics of bailouts even as it looks to buttress the broader economy. There is deep concern about the appearance of having enriched wealthy private equity investors or provided lifelines to firms that were already on the brink of insolvency, while neighborhood shops go under.Politics are also playing a role. A former Trump administration official who speaks to staff at the Fed and Treasury said the Treasury Department had been concerned with the optics of bailouts even as it looks to buttress the broader economy. There is deep concern about the appearance of having enriched wealthy private equity investors or provided lifelines to firms that were already on the brink of insolvency, while neighborhood shops go under.
While it has become a common refrain among Fed officials that they have lending and not spending powers, Capitol Hill is relying on the central bank lending programs as the government’s first line of defense. If they fail, through their own fault or the Treasury’s, censure will likely follow.While it has become a common refrain among Fed officials that they have lending and not spending powers, Capitol Hill is relying on the central bank lending programs as the government’s first line of defense. If they fail, through their own fault or the Treasury’s, censure will likely follow.
“It’s the Fed’s reluctance to take risk that’s going to lead to backlash,” said George Selgin, a senior fellow at the Cato Institute in Washington. “They’re going to err on the conservative side.”“It’s the Fed’s reluctance to take risk that’s going to lead to backlash,” said George Selgin, a senior fellow at the Cato Institute in Washington. “They’re going to err on the conservative side.”