Thursday, August 13, 2020

The Fed Can Do What It Wants

I don't particularly care about the legal arguments, because they've made quite clear through past actions that they will take whatever extraordinary measures they deem "necessary" and come up with some bullshit justifications later. Also, who will stop them? But, yes, they are the backstop against everything collapsing.
Keep in mind that the Fed has bought over 800 companies’ corporate bonds, because they had to keep their promises according to chair Jerome Powell, but the municipal lending is stuck on 1. Some regional Fed presidents have intimated that Treasury is holding up bigger changes on funds to which it contributed its CARES Act share. Others have said that states don’t need liquidity, they need grants, and the central bank’s hands are tied.

Darien Shanske, a UC-Davis professor of law and political science, figured out a way to untie those hands months ago. In a paper co-written with Indiana University’s David Gamage, Shanske lays out how there’s a way to avoid Treasury’s effective veto on the program by lending under the Fed’s Section 14 authority rather than the Section 13 authority being used now. Under those powers, the Fed can purchase six-month notes without needing an equity backstop from elsewhere. The way to extend the terms is to commit to re-purchase the notes every six months for twenty years, with a sliding schedule of repayment of principal. Most localities have a short-term borrowing exception that could make this work.
Gotta point the money cannon somewhere useful. Quickly.