Meet the New Boss

The most memorable official pronouncement during the financial crisis of 2008 came at a Senate Banking Committee hearing on July 15. There, Treasury Secretary Henry Paulson explained why Congress should give him essentially unlimited authority to purchase debt and equity in Fannie Mae and Freddie Mac, the two government-sponsored enterprises whose activities underpinned the struggling housing market:

If you are used to thinking about the issues, it is very intuitive, that if you have got a squirt gun in your pocket, you may have to take it out. If you have got a bazooka in your pocket and people know you have got it, you may not have to take it out. . . . I just say that by having something that is unspecified, it will increase confidence. And by increasing confidence it will greatly reduce the likelihood it will ever be used.

As it turned out, barely a month after Congress gave him the bazooka he wanted, he was yanking it out of his pocket and firing it. A month after that, the Emergency Economic Stabilization Act of 2008 gave him $700 billion intended for the purchase of “troubled assets” but also available for other uses. Under Paulson’s direction, that money would be directly injected into banks.

Same as the Old Boss

The crisis we face today is very different. Our troubles are caused by a deadly virus forcing us to shut down our economy, rather than any defect in the financial system. Instead of radical uncertainty, we are all too sure that the business shutdown aimed at arresting the spread of COVID-19 will exact a massive economic toll—probably much bigger than anything we have experienced since World War II. One might expect our crisis response to look entirely different.

And yet the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 is, in large part, a return to the playbook developed in the last crisis. Its $500 billion Title IV (the “Coronavirus Economic Stabilization Act of 2020”, a title that parallels the 2008 Act) relies heavily on the Treasury Secretary’s judgment to funnel loans to struggling firms, most of it through broad-based Federal Reserve lending facilities. Secretary Steven Mnuchin will be following in the footsteps of his fellow Goldman Sachs alumnus Henry Paulson, with whom he is reportedly in close contact.

To be sure, there is a lot more to the $2 trillion CARES Act than this, much of it befitting the simplicity of our current economic problem. Individuals will receive some $300 billion in cash payments, $260 billion in extra unemployment benefits, and more than $40 billion in interest-free forbearance on student loans. State and local governments (including school districts) will get around $340 billion, and various public services including hospitals around $180 billion.

Then there is the $349 billion Paycheck Protection Program to be administered by the Small Business Administration. Administrator Jovita Carranza’s agency faces an unprecedented administrative challenge in getting money (in the form of loans and loan guarantees) out the door quickly, in an attempt to entice businesses to keep employees on their payrolls for the duration of our lockdown. She will rely on banks with preexisting client relationships, but initially had trouble enlisting their cooperation at an interest rate of 0.5%. Mnuchin, apparently working closely with Carranza, subsequently announced that the rate would be increased to 1%.

Like Paulson and Ben Bernanke before them, Mnuchin and Federal Reserve Chairman Jay Powell may become the front line of the federal government’s economic response in 2020.

Before turning to the Treasury Secretary’s pots of money under CARES, it is worth briefly noting the way he was using his discretion before the law was passed. As the seriousness of the coronavirus outbreak became clear, the Federal Reserve rapidly rebooted many of the liquidity facilities it had created in response to the 2008 financial crisis. Back then, it took years to flesh out its full alphabet-soup menagerie of programs. This time, it brought back its old familiars (PDCF, CPFF, MMLF, TALF, among others) and invented a number of new ones in a matter of weeks—a tour de force of bureaucratic aptitude.

The Fed managed this feat in part thanks to Mnuchin pledging $50 billion from the Exchange Stabilization Fund (ESF) to absorb these programs’ potential losses, thereby relieving the Fed of the credit risk that might legally constrain its ability to act. The ESF was used, with dubious legal justification but excellent practical effect, to bail out the money market industry in 2008. Congress objected and banned a repeat performance—a decision it has reversed in the CARES Act (Section 4015). During emergencies, the ESF can be used to support money markets and, we may infer, just about anything else the Treasury Secretary believes is vital to the economy’s functioning. The ESF (which totaled around $100 billion before the crisis) looks more like a general-purpose slush fund than ever before. If there has been a backlash against its use in that capacity, it has been a very quiet one.

At the Discretion of the Secretary

The money that Congress provided in Title IV of the CARES Act means that the ESF no longer has to play this role since Mnuchin now has $454 billion at his disposal to support the Fed’s facilities as he sees fit. That won’t mean a replay of the firm-specific bailouts that Paulson engineered in September 2008, because the Dodd-Frank Act altered the Fed’s emergency authority (under Section 13(3) of the Federal Reserve Act) to require only “broad-based” facilities available to all similarly situated firms. Still, that leaves the Federal Reserve’s Board of Governors, led by Chairman Jay Powell, to figure out the shape and size of these programs, as well as how much they will leverage the Treasury’s support (apparently 10-to-1). It will be the Fed that administers these programs, cementing the central bank’s position as the nation’s go-to economic defender. Powell, until now known mostly for bearing the brunt of President Trump’s criticism, has accordingly raised his profile somewhat, even giving an interview on NBC’s Today Show, in an attempt to inspire confidence.

Nevertheless, the Treasury Secretary must approve every Fed program under 13(3) and is charged by the CARES Act with the ultimate responsibility for the taxpayers’ money. Mnuchin and Powell apparently have a strong working relationship. Like Paulson and Ben Bernanke before them, they may together become the front line of the federal government’s economic response in 2020.

Economists Amit Seru and Luigi Zingales warn that this Treasury-Fed duo is poised to decimate American capitalism: “if this capital is all deployed by the Fed, and at rates that will surely crowd out private capital, all capital allocation in the U.S. in 2020 will be done by the Federal Reserve System, not by the capital market.” Congress clearly anticipated this possibility and attempted to steer away from it, putting conditions on any firms that receive “direct loans” through the Fed, including restrictions on executive compensation and a ban on stock buybacks and dividends lasting a full year after the loan is repaid. The Treasury Secretary can waive these requirements “upon a determination that such waiver is necessary to protect the interests of the Federal Government” (Section 4003(c)(3)), but this is clearly marked off as an extraordinary possibility by the requirement that the Secretary immediately make himself available to the House Finance and Senate Banking Committees after granting such a waiver. Still, although Mnuchin and Powell seem likely to design their programs so as to avoid crowding out as much as possible, it is remarkable how much is entrusted to their judgment.

Mnuchin’s discretion will be most expansive with the $46 billion provided to him to make direct loans or loan guarantees for specific firms—with $25 billion allocated to passenger airlines, $4 billion to cargo air carriers, and $17 billion for “businesses critical to maintaining national security.” Given how broadly the Trump administration has been willing to define “national security” for the purposes of trade, this last category is effectively open-ended. The one hard constraint that Democrats fought to include is a prohibition on loaning to companies owned by members of the administration or Congress.

Firms that receive such direct support must subject themselves to some exacting conditions—but the nature of these will again be at the Treasury Secretary’s discretion. The loans or guarantees can “contain such covenants, representations, warranties, and requirements (including requirements for audits) as the Secretary determines appropriate.” The interest rate must reflect the prevailing Treasury rate plus an “appropriate” adjustment for risk. Only if “the intended obligation. . . is prudently incurred” can they be eligible; at the same time, the business must be at risk of going under. In all of these cases, Congress has entrusted the operationalization of these requirements to the Treasury Secretary.

All this will leave Secretary Mnuchin as one of the most prolific dispensers of financial assistance in the history of the world. In some ways, it seems like a strange position for someone with no experience in government until 2017. But Mnuchin has been able to earn the trust of both the president (whom he has known for 15 years) and congressional Democrats, including Speaker Nancy Pelosi, who has sought him out as a negotiator. That one amazing photoshoot notwithstanding, his public manner is understated and much less susceptible to caricature than Paulson’s brusque bazooka-bragging. If Congress has decided to put its trust in Mnuchin in this moment of crisis, that may be a conscientious and reasonable choice, but it remains to be seen whether Mnuchin’s use of this immense discretion will fulfill their expectations or surprise them.

Meanwhile, Congress has made some attempts at ex post accountability. Again following the 2008 playbook, the CARES Act will create a Special Inspector General for Pandemic Recovery (Section 4018) and a five-member Bipartisan Congressional Oversight Commission (Section 4020) to carefully oversee the rapid distribution of funds—although Trump’s signing statement has alarmed some who fear that this administration may withhold information from an inspector general. In my book on the responses to the 2008 crisis, I argued that the corresponding bodies overseeing that bailout were frequently obnoxious but ultimately constructive players in preventing against and rooting out abuses.

We are in the early days of this virus-induced economic crisis right now, and so it is far too early to judge the adequacy of the Mnuchin-Powell partnership in meeting our enormous challenges. But it may not be too soon for one observation. Giving leaders extraordinary discretion in times of crisis is nothing new to the American system. Citing examples from Washington, Jackson, and Lincoln to Wilson and FDR, Clinton Rossiter persuasively argued that we (along with other western nations) have a tradition of “constitutional dictatorship.” But Rossiter, who wrote in the wake of World War II, took it for granted that presidents would fill this role.

It is remarkable how little this appears to be the case in either the last crisis when George W. Bush made himself quite scarce in the public eye—perhaps wisely given his abysmal 20-something approval rating at the time—or this one. President Trump continues to be the focal point of a great deal of media coverage (a condition that feels somehow tautological), and Mnuchin and Powell undoubtedly need to retain his support to operate effectively. But it hardly feels like they are his mere subordinates. Instead, we seem to be developing a new tradition of Treasury and Fed dominance in crises.

Given this fact, it is possible that when we look back at the Trump administration’s handling of this economic crisis, we may judge that the President’s most important actions took place years ago when he decided to appoint Mnuchin and Powell. Let us hope those come to seem like prescient choices.

Reader Discussion

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on April 13, 2020 at 11:42:14 am

Well, heck! It is a lot more fun when the Easter Bunny actually "hides" the goody filled Easter Eggs, isn't it. This is a big country, it should not be too difficult to "hide" some eggs.
Also, as children, I remember the surprise when some weeks later an overlooked egg was discovered - only by virtue of its odor.

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Guttenburgs Press and Brewery
on April 13, 2020 at 12:19:31 pm

I disagree with the premise of this essay, that the real power over the economic front in America's defense against (what we all must start calling) the "Red China War on World Health and Stability" now rests in the hands of two men, Fed Chair Powell and SecTreas Mnuchin, not in the direct hands the President.

Article II of the constitution reflects much of Hamilton's sweeping conception of executive power as articulated in his verbally- unloosed June 18, 1787 Convention Speech and later moderated in his Federalist No. 70 essay. Thus the founders created a unitary executive of extraordinary power. Repeatedly throughout American history the President has directly exercised and Congress has routinely deferred to, ratified and at times expanded that comprehensive conception of presidential power, especially during what are publicly-viewed (sometimes rightly and often wrongly) as times of national crisis. During those times the president's delegation of his centralized power has been the rare exception to the rule. What is the rule is direct exercise of presidential authority, albeit, as now, accompanied at times by the false appearance of delegation.

While Washington had political and intellectual giants as go-to guys, it's clear that the decisive, pragmatic Washington, not the brilliant Hamilton, was in charge of financial policy and the neutrality-focused Washington, not the Francophile Jefferson, of foreign policy. And while Jefferson had his politician Monroe to set up the possibility of a Louisiana Purchase, Jefferson alone took the giant step for America (and for mankind,) well beyond his prior constitutional principles, and did the deal, the most important crisis decision Jefferson faced during his presidency. And while Lincoln, with no executive and no meaningful military experience, was forced initially to defer to his ill-chosen early Generals, he quickly took direct, personal control of both the fighting and the politics of the Civil War.

And so on and so on throughout our history. The only major exceptions that come to mind just now to what I would call the "doctrine of non-delegation of presidential power in a crisis" are FDR's disastrous delegation of economic control during the Great Depression to a brain-trust of politically- inexperienced, Ivy League theorists; FDR's brilliant delegation to the incomparable George Marshall of plenary power as (what Churchill called) ''the true organizer of victory" in WWII, Truman's wise delegation to George Marshall both of the presidential power behind the Marshall Plan and of the initial cold war strategy to contain Soviet expansion, George W. Bush's typically-foolish delegation to General Tommy Franks of the president's unsupportable decision to invade Iraq and to the State Department of his delusional decision to democratize Iraq, and Obama's delegation to John Kerry of his un-American Iran nuclear decision-making.

President Trump, thus far, has delegated no authority over anything, albeit in his early exercise of presidential power, while learning on the job, he made a few serious errors in personnel and relied, at times, on some bad advice and poor advisers, mistakes which he corrected, at times belatedly.

There is now, however, with the Red China Corona Virus Crisis, the disturbing appearance (which his arsonist media enemies would seek to inflame) that, contrary to the "doctrine of non-delegation of presidential power in a crisis," President Trump has delegated both his economic and his public health powers in WW IV, America's existential defense against the "Red China War on World Health and Stability." Now, as the public cry grows for extra-constitutional crisis-control authoritarianism, President Trump has appeared to accede to that bellowing by sharing the power of his crisis control, bully presidential pulpit, his daily Corona Podium press conferences, first with two bureaucrat/scientists from the CDC who eschew cost-benefit analysis and would rely on speculative models of morbidity and mortality (that are as yet mathematically-unverifiable) and most recently by sharing that crisis control, bully pulpit with two fiscal and economic policy bureaucrats, Mnuchin and Powell.

How can we trust "these people," the Administrative State bureaucrats, with what are in essence existential political decisions? Under our constitution and pursuant to our best traditions, national decisions in America about what to do on national public matters that matter are, properly, to made by the people acting through their elected representatives: the President and the Congress. The people must not allow bureaucrats to make those decisions. Particularly in a crisis too much is at stake for the people to trust the bureaucrats and their over-hyped, underwhelming, too-often misguided scientific and economic expertise.

But now President Trump has mistakenly made bureaucrats into media darlings. In doing so he has made public what should be their privately-spoken, confidential advice to the president. And in so doing Trump risks making the preferred policy and action options of bureaucrats publicly unchallengeable and beyond presidential control.

The president must immediately deny bureaucrats access to his bully pulpit, the presidential crisis podium, and retake the non-delegable duty of presidential power from the false appearance of delegation, a false appearance which he himself has created.

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on April 13, 2020 at 16:28:47 pm

Let me begin by commending Paladin for his quite exceptional presentation of the dynamic, both current and (probably) ongoing AND the PREFERRED narrative of the would be (and actual / nascent) Petty Tyrants comprising our present political and media order. It is absotively Spot-On.
see the short link below:


I suspect that the "reportage" (such as that has come to be practiced in 21st century) is more of proselytizing than factual communication of a trend or of an empirically observable phenomenon.

Perhaps, it is my own background as a poor NY City street urchin that a) leads me to discount all these "reports" of the citizenry's adoration / deference to *experts and b) the memory of the invariable reaction of so many working class citizens to the typical gobbledygook promulgated by *experts.* The phrase "something so stupid only an academic (or expert) could believe RESONATED quite deeply with those who had occasion to receive the beneficent [mal]administration(s) and expressed and open disdain of experts over the course of their lives.

I do not observe that this attitude has changed. On the contrary, as evidenced by recent news of nascent protests against the ChiComm Flu induced restriction of liberties, I question the strength of the peoples deference to *experts* and, moreover, the sustainability of even the present reluctance to express reserve concerning those ChiComm Flu policies.
Do the considered opinions / wisdom of experts ACTUALLY inform us that Easter Sunday churchgoers are to be fined? do those same experts inform us that the sacrament of communion is now to be properly regulated / ordered by some *expert* guidance communicated, and to be implemented by, an expert politician such as Governors, Mayors, and local dog catchers?

At what point will the grossly inflated "models" propagated by *experts* be deemed false, and perhaps intentionally so in order to bolster the experts own / agency's standing? At what point will people accept the wisdom of that famous comedian, Groucho Marx - "Who you gonna believe me - or your own lying eyes"? At what point will we demand that the *data* be made transparent? that the classification of ChiComm Flu deaths be shown to be carelessly (intentionally?) inflated by including those who MAY, but clearly not certainly, have ChiComm Flu?

I suspect that the tolerance for *expert* opinion will surely subside.
Let us hope that after this viral hysteria the regard for *expert* opinion follows the path of bell-bottom jeans, plastic bag bans and is neither expressed nor exhibited in decent company.

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on April 14, 2020 at 12:14:30 pm

“Cuomo: I’ll Choose When To Reopen NY, Not Trump; Trump: Cuomo Can’t Have Independence Now.”

We still do not know if this virus was created accidentally or intentionally as a form of “euthanasia”, by an atheistic materialistic government that does not respect the inherent Dignity of innocent human life.
What we do know is that neither WHO, The UN, or even Bill Gates, desire to question the atheistic materialist Government Of China to get the answer to the question:
What exactly was going on in that laboratory in Wuhan?
Certainly in order to serve The Common Good, we all, including the people of China, have a right to know.

If we are talking about Biowarfare, then we are talking about an issue of National Defense, so there is no shift in government position in regards to the best way to attack bio warfare while providing for our National Defense.

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on April 23, 2020 at 06:28:38 am

[…] (How do I know this? Because numerous legislators have since proclaimed this to be the true intent of Congress. And because institutional investors and Wall Street bottom-feeders will demand it. In 2010, when Build America Bonds ran out, they amounted to over one-third of new muni issues. Given the sheer scale the Fed will have to do better this time around. Mr. Mayor, meet your new boss: Jerome Powell.) […]

on April 24, 2020 at 06:55:36 am

[…] This essay was previously published by Law & Liberty. […]

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