Quick Note On The Federal Reserve Board

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When Pennsylvania Senator Pat Toomey, at the last minute, insisted on adding language to the pandemic rescue package, stripping the Fed of emergency powers, I was among those screaming “No Deal.”  I have not always been a huge fan of the Fed, but I felt this plan was a deliberate effort to sabotage an effective response to any financial/economic crises that may arise in a Biden administration.

Just for background, we know that the Republicans are perfectly fine with sabotaging the economy in order to hurt the political prospects of a Democrat in the White House. This is exactly what they did under President Obama, as they demanded recovery killing austerity as they feigned concern about deficits. Republican Senate Leader Mitch McConnell openly said that his job was to make Obama a one-term president.

With this recent history, there can be little doubt that Republicans in Congress will do everything they can to sabotage the economy under President Biden. In this context, it is especially important that the Fed have the ability to take the steps necessary to counteract crises that could arise.

The specific power at issue with Senator Toomey’s proposal was whether the Fed could establish special lending facilities to help a market facing a crisis. This could be the situation if, for example, there is a sudden fear of widespread bankruptcies in the municipal bond market, if a major city defaults on its debt.

Without emergency powers, the only thing the Fed could do is to push down Treasury bond rates (they are already very low) and buy some short-term municipal debt. It could not engage in purchases of long-term debt and commit to support the market. Many, perhaps most, Republicans in Congress would then be celebrating as “Democrat” cities lost their ability to borrow and suddenly were unable to pay their bills.

Fed critics (I have often been one myself), have argued that we should not view the Fed as an ally of progressives. It certainly has a very mixed record, so there are plenty of grounds for suspicion. Under Paul Volcker and Alan Greenspan, the Fed repeatedly raised interest rates in an explicit effort to weaken workers’ bargaining power and thereby reduce wages. This was done ostensibly to prevent inflation.

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