MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.
NICK EICHER, HOST: Joined now by financial analyst and advisor David Bahnsen.
DAVID BAHNSEN, GUEST: Good morning, Nick.
EICHER: I love how the Wall Street Journal opened its Friday editorial: there is no permanent thing like a temporary government program, quoting Milton Friedman. But the editorial lauded Steve Mnuchin, the treasury secretary, for declining to extend the temporary Federal Reserve bank lending facility. Can you take several minutes and explain what happened, please?
BAHNSEN: Yeah, I sure can.
It isn’t quite as optimistic as getting rid of a full government program because this one was a special vehicle for the Fed that was created under the CARES Act that Mnuchin just simply said we’re going to let it expire as it’s set to expire December 31. And even then there were four other facilities he actually is extending. They’re kind of emergency liquidity facility for money markets and commercial paper. They’re continuing those.
But some of the ones that were barely ever really needed or used anyway, they’re not extending them. And so I guess in the small picture it is good that they’re not extending it in the sense that it doesn’t allow Milton Friedman’s warning to play out. But in the big picture we shouldn’t fool ourselves. The big picture reality of the Federal Reserve becoming far more interventionist and relevant in times of crisis in American economic life, well, that’s not going anywhere.
EICHER: Explain, though, the purpose behind a Federal Reserve lending facility. The understanding I had when Congress passed the Cares Act was that there might be a liquidity problem for businesses, meaning trouble sourcing operating cash because the normal markets weren’t functioning properly in a time of economic crisis and then only the Fed could step in and make it happen. Explain why that is.
BAHNSEN: Yeah, I mean, the whole existence of the central bank is centered around the idea of them being the lender of last resort, that if in during a time of economic contraction, everyone is holding onto their dollars and their assets, then there’s no liquidity. No ability to transact. No ability for money to move. And to facilitate transactions and economic activity.
And I think that the Fed played a very important role in March—the kind of, I would argue, legitimate function of getting malfunctioning markets functioning again via being a liquidity provider is out of the CARES Act, they also intervened to help in the corporate credit market.
They created what they call this Main Street lending program. They did a whole bunch of other things that were meant to kind of heal certain asset classes, corporate debt for good companies, not junk credits. The costs have gotten quite high. There was a total mismatch of buyers and sellers.
That did last for about two weeks and it was brutal. And I think the Fed even announcing that they were coming into the market helped heal the market, but it’s ridiculous now.
It helped everyone for a couple weeks back in March. They haven’t even used the facility in months. They’ve only given out a few billion dollars out of hundreds of billions that had been allotted. And then the main street lending program is even more ridiculous. They gave out less than one percent of the total amount that the facility was set for. They gave 3.7 billion out of 600 billion.
And, ultimately, the main street lending facility is really what proves what’s going on is that the companies don’t need access to credit. They have access to credit.
And so the whole thing, I think, is very logical what Secretary Mnuchin did and the press reaction in the first 24 hours afterwards was not just wrong—because they don’t even believe what they were saying—it was totally dishonest.
EICHER: OK, so that’s the media. But both the Fed chairman and Joe Biden—or, through his economic team—opposed what Mnuchin did. What’s the best argument against it? Or is there one?
BAHNSEN: Well, what the Joe Biden people did was immediately come out to say it was political. Like, “Oh, he’s trying to hurt the economic recovery as a new team comes in.” Because in this country, there is a vast majority of people that are not going to understand all the economic minutiae and it’s very easy to politicize anything just by using rhetoric.
So, they came out and say, “Well, Mnuchin had some toys and he’s taking the toys away, therefore it’s going to be unfair for us.”
But none of it is logical or rational.
In terms of what Chairman Powell said, he acknowledges that they’re not using the facilities that are not needed. He just said, why not maintain that flexibility with us so that if something does come up, we have the bullet already in the gun? In other words, he’s arguing philosophically, hey, you need to keep the central bank in a position and so he’s kind of wanting to restructure the intent of the CARES Act provisions which were meant to be emergency.
He’s saying, OK, it was emergency, but you know another emergency could come up, too, so let’s just kind of keep the stockpile around in case we need to use it later.
So, yeah, central bankers are going to wanna central bank.
EICHER: [Laughs] I love it!
AUDIO: Haters gonna hate. Central bankers gonna central bank!
Words to live by.
David Bahnsen, financial analyst and adviser. David, thanks, good to talk to you.
BAHNSEN: Thanks for having me, Nick.