While the Dodd-Frank Act did take away some of the Fed’s tools, former regulators say the situation facing the economy today may not be best solved with the crisis-era measures that were used in 2008 and beyond. Instead, Congress and the White House may need to deploy other programs to help prop up affected industries.
“There were a number of tools taken away that shouldn’t have been taken away,” said Ben S. Bernanke, who was the Federal Reserve chair during the 2008 financial crisis. “If they’re willing to rethink some of those things, that’s a good thing,” but most of the Fed’s use of such tools pertained to the financial sector “that doesn’t seem to be where the problem is now.”
“In 2008 the problem was that major financial firms were facing runs,” he said, and therefore needed cash. “In this situation, the nonfinancial corporates are where the problem is — that is, think about an airline or a restaurant” that is unable to make payroll.
When it comes to preventing such disruptions, Mr. Bernanke said, “that is something, in the first line of defense, that Congress can do.”
The Fed did some lending aimed at nonfinancial companies — including through its commercial paper funding facility and the Term Asset-Backed Securities Loan Facility, which helped meet household and small-business credit needs — and authority for those programs still exists. For corporate bailouts, Mr. Bernanke said, lawmakers should be the first line of defense.
“It’s more democratic and accountable if Congress were to take the lead,” he said.
Henry M. Paulson Jr., who was President George W. Bush’s Treasury secretary in 2008, wrote in a Washington Post op-ed last week that one of the lessons from that crisis was that the executive branch might need more authority from Congress to take quick action.
“Notwithstanding tensions between the parties and between the branches, it may be necessary to give the administration broad authority and flexibility to act, within the parameters and oversight structure set by the legislature,” Mr. Paulson wrote. “Congress can’t design and implement every stimulus program or turn on a dime to give new authorities to the executive when facts on the ground change.”
Hal Scott, an emeritus professor at Harvard Law School and the director of the nonprofit Committee on Capital Markets Regulation, said the Fed must restore its ability to be the world’s most powerful lender of last resort. It was unfortunate that such authorities needed to be reinstated amid a crisis, he said.
“It would have been better to do it before the crisis,” Mr. Scott said. “When you get into a crisis and you do it, there’s a concern that you’re sending a panic signal — that we’ve got to do this, we need this power.”
Even without renewed authorities, economists have widely speculated that the Fed could dust off its crisis-era playbook, reviving programs to help companies and financial institutions to weather the shock of the coronavirus. Michael Feroli, an economist at J.P. Morgan, has suggested that the Fed could use another program like the Term Asset-Backed Securities Loan Facility, or TALF, to help keep credit flowing to households and businesses because “the financial viability of some small businesses is a central concern right now.”
That could also include a Fed program to help corporations that issue short-term debt as a source of funding, known as commercial paper.
Krishna Guha and Ernie Tedeschi at Evercore ISI, an investment banking advisory firm, now expect the Fed to add a commercial paper funding facility “to what we see as an imminent super-aggressive package of measures to mitigate the virus shock and stabilize fixed income and credit markets.”
They said they saw increasing evidence that such a commercial paper measure — which would provide credit to companies to help keep them functioning — is immediately necessary, and speculated that an announcement could come as soon as Sunday or Monday.
Congress has so far taken incremental steps to provide financial help. The House voted early Saturday to pass an economic relief bill that Mr. Mnuchin and Speaker Nancy Pelosi had negotiated to help small businesses cover costs associated with the coronavirus, such as sick leave. It also provides free coronavirus testing and funding for food stamps, among other measures. The Senate is expected to vote on the legislation on Monday.
Mr. Mnuchin said in statement on Saturday evening that in enforcing the law, Treasury would use its regulatory authority to allow employers to use cash deposited with the Internal Revenue Service to pay sick leave wages, and that it would make advances to small businesses that do not have sufficient taxes to draw from to cover such costs.
Despite Mr. Mnuchin’s comments about preparing for a crisis, Trump administration officials continued to express optimism that any economic disruption would be short-lived.
The Treasury secretary said he did not believe that the United States economy was currently in a recession and predicted that economic activity would pick up again after the virus was successfully confronted.
Speaking on “Face the Nation” on CBS, the White House economic adviser Larry Kudlow said he hoped the Senate would quickly pass the House legislation. The administration was considering additional proposals to help airlines, which the White House would discuss on Capitol Hill this week, he said, including potential loan guarantees.
Mr. Kudlow acknowledged that the economic situation would be “very challenging in the short run,” but he said that American supply chains were continuing to flow and that the United States would be back to a strong economy by the end of this year.
Ana Swanson contributed reporting.
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