The Constitutional Case for the Fed ’s Treasury Backstops

George SelginOne of the more controversial provisions of the CARES Act consists ofthe $454 billion it allows the U.S. Treasury to devote to " backstopping " (that is, to supply partial funding for) the Federal Reserve ' s emergency lending.In a previous post, I argued that these Treasury backstops help to preserve the " boundary line " separating fiscal from monetary policy. I ' ve since engaged ina spirited Twitter exchangewith Peter Conti-Brown, Dan Awrey, and Kate Judge —all legal scholars specializing in monetary policy. That exchange inspires me to offer this more complete, but qualified, defense of the Treasury ' s backstopping of risky Fed lending programs.Leverage, SmeverageBefore I take up the legal case for Treasury backstopping, I want to clear the air of a distracting pseudo-economic rationale for it: the " leverage " argument.According to Secretary of the Treasury Mnuchin, with the help of $454 billion in CARES Act funds, the Fed can " lever up " its emergency lendingby some $4 trillion. Jay Powell has also appealed to the leveraging rationale, saying that every dollar of additional Fed loss-absorption capacity is worthanother $10 in Fed emergency lending.Were the Fed an ordinary bank, this " leveraging " argument might make sense. Ordinary banks can ' t operate without capital, which allows them to take risks by absorbing unanticipated losses, from bad loans or otherwise. Both economic incentives and legal requirements compel such banks, not only to stay solve...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs