Mnuchin cites principles of collecting the Fed’s money. Democrats See Politics.

WASHINGTON – Treasury Secretary Steven Mnuchin sharply broke with the Federal Reserve this week, choosing to end a variety of programs aimed at helping markets, businesses and municipalities weather the pandemic and calling on the central bank to return funds to support these efforts.

Mr Mnuchin said his decision was motivated by a deference to what he believed Congress intended when it allocated the funding, a desire to reallocate the money to better uses, and the belief that markets no longer needed it. But his actions, which will limit the ability of the new Biden administration to use these programs on a large scale, appear to be politically motivated.

“The law is very clear,” Mnuchin said in an interview on CNBC Friday. He defended his decision and suggested that the programs were no longer needed, as market conditions “are in great shape”.

But this view is not shared by the Fed, which quickly issued a statement expressing its disappointment with the decision, calling the economy “still strained and vulnerable.” It should be noted that Mr. Mnuchin only publicly took the position that Congress wanted the programs to end after December 31 once it became clear that President Trump had lost the election to Joseph R. . Biden Jr.

By ending the programs – which provided loans to midsize businesses and supported municipal and corporate bond markets – Mr. Mnuchin removes a source of economic support as the new administration takes office and as cases rise. virus results in recovery. . By asking the Fed to return the money that enables the emergency efforts, it could make it harder for Democrats to restart them on a large scale and on more generous terms.

President Jerome H. Powell said the Fed would return the funds in a letter to Mnuchin on Friday afternoon.

“It’s not just about closing the store for Biden,” said Ernie Tedeschi, political economist at Evercore ISI. “He’s burning down the store.”

Mr Biden’s transition team criticized the move because it tried to hamper its ability to help the economy.

“The Treasury Department’s attempt to prematurely end support that could be used for small businesses across the country when faced with the prospect of further closures is deeply irresponsible,” said Kate Bedingfield, spokesperson for the transition, in a press release.

Mr Mnuchin’s decision surprised Mr Trump, who was alerted to the decision shortly before Mr Mnuchin’s letter was released on Thursday and who on Friday morning expressed some concern that the decision could have a negative impact on the action. market, according to a person familiar with the matter who was not authorized to speak publicly. When asked if Mr Trump ordered Mr Mnuchin to end the programs, Mr Mnuchin’s spokeswoman said it was “only a Treasury decision based on what the law and the intention of Congress demanded ”.

Here’s a look at how these programs work, why Mr Mnuchin says he kills them, and why his arguments leave questions unanswered.

The programs are a collaboration.

Mr Mnuchin is ending a package of emergency lending programs from the Fed, which the central bank can use to maintain credit in times of crisis. After the 2008 recession, Congress insisted that the Treasury Secretary approve these efforts.

The Fed is loath to accept credit losses, so the Treasury has provided a layer of cash to cover any loan or purchase that goes wrong. He first used the Exchange Stabilization Fund, an unused pot of money. But in March, Congress bolstered the capacity of the Treasury.

Mr Mnuchin and lawmakers allocated $ 454 billion to support Fed loans when they reached agreement on a government pandemic response plan. The Fed can make money out of thin air, and it only needs a little support – $ 1 in insurance can be turned into up to $ 10 in bond purchases or commercial loans . The programs offered enormous potential for government money.

Mr. Mnuchin eventually allocated $ 195 billion to specific loan programs. Little of this ability has been used. Some programs have calmed market conditions simply by reassuring investors. The small and medium-sized business loan program had restrictive conditions.

When Mr Mnuchin said on Thursday that he would end all five credit-backed programs at the end of 2020, he asked the Fed to pay back all but $ 25 billion, which he is leaving to support loans already. granted and bond purchases.

The law is not “clear”, as Mr. Mnuchin said.

Mr Mnuchin said “it is very clear in the law” that grant funded programs are to end on December 31. This is not true.

The law states that the Treasury should not distribute money from its $ 454 billion pot after the end of 2020 – but it allows funds already dedicated to remain available. Because the Treasury had turned over hundreds of billions of dollars in insurance money to the Fed, the central bank theoretically has a lot of capacity to make loans and buy bonds.

Fed lawyers have interpreted the law to mean that they can maintain ongoing programs until 2021, backed by support from the existing Treasury, as the central bank statement said on Thursday.

Mr Mnuchin himself had previously suggested the programs could be extended beyond the end of the year, writing in an October letter that the decision would depend on market conditions.

A spokeswoman for the Treasury said on Friday that Mr Mnuchin had always believed Congress wanted funding to stop and that he planned to use money from the Exchange Stabilization Fund – plus the $ 25 billion that ‘he leaves with the Fed to cover existing loans – to extend the programs if necessary.

This logic is difficult to follow given Mr. Mnuchin’s belief that the law prevents further Fed lending backed by congressional money after Dec. 31. If so, it should also prevent further loans against the $ 25 billion, which comes from the same Congress pot. , said Peter Conti-Brown, lawyer and Fed historian at the University of Pennsylvania.

Congress cannot reuse money for free.

Mr. Mnuchin also suggested that taking back the earmarked money would allow Congress to redirect it to other purposes in a way that “won’t cost taxpayers any more money.”

But the Congressional Budget Office, assessing the budgetary impact of money spent on Fed programs, found it to be almost free. The idea was that the loans that the money guaranteed would eventually be repaid and that fees and interest would cover all expenses. So if the money is recovered and reallocated to expenses – not loans – it would add to the deficit for accounting purposes.

Market distortions have always been a concern.

Senior Republicans have suggested that leaving operational programs too long could distort markets, which is a real concern with such support schemes. In his letter announcing his intention to close the programs, Mnuchin stressed that normal market conditions prevailed.

It is true that the issuance of corporate bonds has been rapid and that states and communities are able to finance themselves at low rates. But virus cases are also on the rise, suggesting conditions may worsen and Fed support may be needed again.

Over the summer, Mnuchin agreed to extend programs until December 31, when coronavirus infections were much lower than today, markets were performing well and companies were issuing bonds. at breakneck speed.

Democrats say the move was political. Republicans applaud him.

The Treasury’s decision to recover the funding limits Mr. Biden. The Fed and the next Treasury Secretary can use the currency stabilization fund to support bond purchases and business loans.

But it contains much less money than the government would have had with the appropriation of Congress. It could hamper a goal that had spread among Democrats: restarting programs, making them more generous, and using them as a fallback option if further stimulus was hard to come by Congress.

Sen. Mitch McConnell of Kentucky, the majority leader, said the demand to end the programs and return the money was “fully within the letter of the law and with the intent of Congress.”

Democrats reacted with outrage.

“It is clear that Trump and Mnuchin are prepared to wickedly destroy the economy and make it as difficult as possible for the new Biden administration to reverse this crisis and lead the country to a recovery,” said Representative Maxine Waters of California. in a letter. .

Jim Tankersley contributed reporting.