When members of Congress asked the Federal Reserve to provide emergency loans to nonbank companies, they did not like the response. “The Federal Reserve would be extremely reluctant to extend credit,” the Fed chair said. “Questions of industrial policy are best resolved by Congress.”
Of course, that was not current Fed Chair Jerome Powell. It was former Chair Ben Bernanke.
During the 2008 financial crisis, politicians pressured the Fed to extend emergency loans to failing US automakers, particularly General Motors (GM). Although section 13(3) of the Federal Reserve Act does authorize the Fed to lend to nonbank companies in times of “unusual and exigent circumstances,” such powers are granted with the intent of protecting the financial system by providing assistance only to businesses with direct ties to struggling US banks.
In response to this pressure, Chair Bernanke wrote a letter to the Congress advising against the Fed’s involvement in lending to nonbank companies. The Fed would be reluctant, he said, to extend credit to automakers such as GM. Such actions, “would take us into distinctly new realms of policymaking,” Bernanke warned. “It would raise the question as to whether the Federal Reserve should be involved in industrial policy, which has traditionally been outside the range of our responsibilities.”
Bernanke’s 2015 memoir similarly recalls the events: “Members of Congress called on the Fed to lend to the auto companies. We were extremely reluctant.” At Bernanke’s behest, Fed officials resisted demands by Congress to expand the scope of their activities. Instead, they limited their actions to those commensurate with the goals and objectives of a prudent central bank. “We believed that, consistent with the Fed’s original purpose, we should focus our efforts on the financial panic.” After all, the Fed has no particular advantage in the area of industrial policy. “We were hardly the right agency to oversee the restructuring of a sprawling manufacturing industry, an area in which we had little or no expertise.”
Central banks tend to avoid targeted policies that, in effect, require picking winners and losers by subsidizing specific industries or companies. Bernanke believed such policies should be enacted by voters through their Congressional representatives, not by an independent agency like the Fed. As his letter describes, these policies “require balancing political and social priorities about the shape and desirability of involvement by domestic companies in specific industries.”
Entanglement in political decisions can also threaten the Fed’s independence. On this issue, four former Fed chairs, including Bernanke, agree: “The economy functions best when the central bank is free of short-term political pressures.”
The Fed has not been sufficiently reluctant, however, in its response to the coronavirus crisis and lockdown. It has far surpassed its normal activities, even those of 2008. It has agreed to lend to a broad range of businesses rather than limiting its role to supporting the financial system. The Fed’s Main Street Lending Program (MSLP) will purchase the loans that banks make to small and medium-sized businesses. The Secondary Market Corporate Credit Facility (SMCCF) purchases corporate bonds in the open market, while the Primary Market Corporate Credit Facility (PMCCF) makes loans to large corporations directly. Such activities were previously outside the Fed’s authority, but Congress granted the Fed these new powers in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
As they did for GM, members of Congress are again pressuring the Fed to go beyond its stated objectives by lending to nonbank companies. The CARES Act allows such actions, but it does not require them. The ultimate decision lies with policymakers at the Fed. How could they resist these new-found powers?
Fed officials should follow the example set by Ben Bernanke. They should be “extremely reluctant” to engage in facilities like the MSLP, SMCCF, and PMCCF. Such programs are “outside the range of [the Fed’s] responsibilities.” They are fiscal policies that “are best resolved by Congress” since they require “balancing political and social priorities.” The Fed has little expertise in these areas and is “hardly the right agency to oversee the restructuring of a sprawling manufacturing industry.”
To help the Fed accomplish its goals and protect its independence, Chair Powell should be a little more reluctant.