In a battle reminiscent of the initially unsuccessful efforts to pass legislation to address the Great Recession in 2008, Republicans and Democrats have thus far failed to advance a $2 trillion relief bill for the coronavirus recession. The only way forward may be to let the Federal Reserve resolve this dispute.
The sticking point in negotiations is a provision giving the Treasury Department nearly $500 billion to make loans to troubled corporations. Democrats argue that it amounts to a “slush fund” for the president’s friends and allies. Republicans counter that the White House needs flexibility to address a national emergency. Whether the bill will include an “accountability panel” remains to be seen.
It is a given that there is enormous mistrust between the administration and the House, which just last year impeached President Donald Trump on grounds that he misused appropriations. That distrust is not simply going to vanish in the crisis. It is also true that maximum flexibility is needed to deal with the pandemic.
Early drafts of legislation by the House including provisions demanding worker representation on corporate boards and diversity requirements for loans, to be overseen by an inspector general. Given the public outcry from bailouts in 2008, it makes political sense that House members would want such restrictions. Unfortunately, these types of restrictions could severely limit the effectiveness of the program.
Unlike in 2008, the government isn’t bailing out firms that engaged in bad behavior. Indeed, most of the economic fallout will occur because businesses and families are following the health guidelines outlined by the Centers for Disease Control and state governors. These guidelines are designed to slow the spread of the virus, and the government is right to encourage them.
If federal money to continue operations comes with strings attached, some businesses may be afraid to take it for fear it will put them at a competitive disadvantage over the long term. They may attempt to ride out the crisis without government assistance. This makes sense from any single company’s perspective, but collectively it increases the risk that a wave of bankruptcies will ripple through the economy.
Even worse, it may encourage some firms to keep workers on the job. While the health crisis has reached extreme levels in three states, it’s only at the beginning stages in others. The goal should be to keep states from falling into the same trap that New York, in particular, is experiencing. That means closing up early and following the most extreme social distancing policies they can afford.
The best option, then, may be for the entire emergency stabilization fund to be used to provide capital for the Fed’s expanded lending programs. The bank has shown willingness to greatly expand its lending capabilities, and Chairman Jerome Powell is seen as an honest public servant with genuine concern for the plight of working Americans.
The most recent Senate bill already directs the Treasury to disperse the funds in coordination with the Fed. This arrangement would formalize a process that is already in place. And the Fed, in turn, can multiply the impact by using its own funds to complement those authorized by Congress.
This compromise allows for maximum flexibility while sidestepping the issue of mistrust between the White House and Congress. The U.S. is fortunate that it has a public servant with Powell’s credibility — and it should use his credibility now to stem the economic fallout from the COVID-19 pandemic.