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What is 13-3? Why a Fed debate is holding stimulus talks

As markets collapsed in March, the Federal Reserve unveiled new programs to maintain credit to states, midsize companies and large corporations – and Congress handed Treasury Secretary Steven Mnuchin $ 454 billion dollars to support the effort.

Nine months later, Senate Republicans are trying to make sure those same programs cannot be restarted after Mr Mnuchin let them end on December 31. that would limit the Fed’s powers going forward, potentially preventing it from lending to businesses and municipalities in future crises.

The last-minute move has drawn the wrath of Democrats and jeopardized the fate of the relief legislation that economists say is badly needed as households and businesses watch a grim winter of a pandemic. Here’s a look at how the Fed’s lending powers work and how Republicans are looking to change them.

The Fed’s main and best-known job is to set interest rates to guide the economy. But the central bank was established in 1913 largely to avoid banking problems and financial panics – when people get nervous about the future and rush to withdraw their money from bank accounts and sell stocks, bonds and d other investments. Congress dramatically expanded the powers of the Fed to deal with panic during the Great Depression, adding section 13-3 to the Federal Reserve Act.

This section allows the Fed to act as a lender of last resort in “unusual and urgent” circumstances – in short, when markets are not functioning normally because investors are particularly worried. The central bank made extensive use of these powers during the 2008 crisis, notably to support politically unpopular bailouts of financial firms. Congress subsequently changed the powers of the Fed so that it needed the blessing of the Treasury to roll out new emergency lending programs or to materially modify existing ones.

During the 2008 crisis, the Fed mainly served as a real lender of last resort – it mainly supported the various financial markets by offering to intervene if conditions really deteriorated.

The 2020 emergency loan programs have been much larger. Last time around, the Fed focused on parts of Wall Street that most Americans know little about, such as the commercial paper market and primary dealers. This time, it reintroduced those measures, but it also unveiled new programs that kept credit available in virtually every sector of the economy. He offered to buy municipal bonds, supported bank loans to small and medium-sized businesses, and bought back corporate debt.

This broad package was a response to a real problem: many markets collapsed in March. And the new programs generally worked. While conditions were not very generous and relatively few state and local businesses and borrowers took advantage of these new programs, their existence gave investors confidence that the central bank would prevent a financial collapse.

Most lawmakers agreed that the Fed and Treasury had done a good job reopening credit markets and protecting the economy. But Senator Patrick J. Toomey, a Republican from Pennsylvania, started asking questions this summer, about the end of the programs. He said he was worried the Fed might overstep its limits and replace private lenders.

After the election, other Republicans joined in Mr. Toomey’s efforts to end the programs. Mr Mnuchin announced on Nov. 19 that he believed Congress had planned the five congressional-backed programs of $ 454 billion allowed to stop lending and buying bonds on Dec. 31. He shut them down – while leaving a handful of mostly older programs open – and asked the Fed to return the money he loaned to the central bank.

The Fed issued a statement saying it was not happy with its choice, but agreed to return the money.

Democrats criticized the move as being designed to limit the options of the new Biden administration. They began discussing the possibility of recovering the funds and restarting the programs once Mr Biden took office and his Treasury secretary was confirmed, as Mr Mnuchin’s decision to shut them down and recover them. the funds rested on a questionable legal basis.

The new republican movement would cut this option. Legislative language circulating early Friday suggested that it would prevent “any program or facility similar to any established program or facility” from using the 2020 credit. If that would still allow the Fed to provide liquidity to Wall Street during a crisis, it would. could seriously limit the freedom of the central bank to lend to businesses, states and communities in the future.

In a statement, Senator Elizabeth Warren, Democrat of Massachusetts, called it an attempt to “sabotage President Biden and the economy of our country.”

Mr. Toomey defended his proposal as an effort to shield the Fed from politicization. For example, he said Democrats could try to make the Fed’s programs much more generous to states and local governments.

The Treasury Secretary would need the Fed’s approval to improve conditions to help senior borrowers. But the central bank might disagree, as it has generally approached its powers with caution to avoid attracting political scrutiny and to maintain its status as a non-partisan institution.

Fed officials have avoided weighing in on the ongoing congressional showdown.

“I will have nothing to say about this beyond what we have already said – that Secretary Mnuchin, as Secretary of the Treasury, would like the programs to end on December 31” and that the Fed will make it Money as requested, Richard H. Clarida, the Fed’s vice chairman, said Friday on CNBC.

More generally, he added that “we think the 13-3 installations” have been “very valuable”.