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      What Is 13-3? Why a Debate Over the Fed Is Holding Up Stimulus Talks

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      AdvertisementContinue reading the main storySupported byContinue reading the main storyWhat Is 13-3? Why a Debate Over the Fed Is Holding Up Stimulus TalksThe Fed’s emergency lending authorities are a key part of its job. Republicans want to curb them. Democrats are pushing back.Senate Republicans are trying to make sure that emergency programs backed by the Federal Reserve cannot be restarted after they expire on December 31.Credit…Anna Moneymaker for The New York TimesDec. 18, 2020Updated 7:49 p.m. ETAs markets melted down in March, the Federal Reserve unveiled novel programs meant to keep credit flowing to states, medium-sized businesses and big companies — and Congress handed Treasury Secretary Steven Mnuchin $454 billion to back up the effort.Nine months later, Senate Republicans are trying to make sure that those same programs cannot be restarted after Mr. Mnuchin lets them end on Dec. 31. Beyond preventing their reincarnation under the Biden administration, Republicans are seeking to insert language into a pandemic stimulus package that would limit the Fed’s powers going forward, potentially keeping it from lending to businesses and municipalities in future crises.The last-minute move has drawn Democratic ire, and it has imperiled the fate of relief legislation that economists say is sorely needed as households and businesses stare down a dark pandemic winter. Here is a rundown of how the Fed’s lending powers work and how Republicans are seeking to change them.The Fed can keep credit flowing when conditions are really bad.The Fed’s main and best-known job is setting interest rates to guide the economy. But the central bank was set up in 1913 in large part to stave off bank problems and financial panics — when people become nervous about the future and rush to withdraw their money from bank accounts and sell off stocks, bonds and other investments. Congress dramatically expanded the Fed’s powers to fight panics during the Great Depression, adding Section 13-3 to the Federal Reserve Act.The section allows the Fed to act as a lender of last resort during “unusual and exigent” circumstances — in short, when markets are not working normally because investors are exceptionally worried. The central bank used those powers extensively during the 2008 crisis, including to support politically unpopular bailouts of financial firms. Congress subsequently amended the Fed’s powers so that it would need Treasury’s blessing to roll out new emergency loan programs or to materially change existing ones.The programs provide confidence as much as credit.During the 2008 crisis, the Fed served primarily as a true lender of last resort — it mostly backed up the various financial markets by offering to step in if conditions got really bad. The 2020 emergency loan programs have been way more expansive. Last time, the Fed concentrated on parts of Wall Street most Americans know little about like the commercial paper market and primary dealers. This time, it reintroduced those measures, but it also unveiled new programs that have kept credit available in virtually every part of the economy. It has offered to buy municipal bonds, supported bank lending to small and medium-sized businesses, and bought up corporate debt.The sweeping package was a response to a real problem: Many markets were crashing in March. And the new programs generally worked. While the terms weren’t super generous and relatively few companies and state and local borrowers have taken advantage of these new programs, their existence gave investors confidence that the central bank would prevent a financial collapse.But things started getting messy in mid-November.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 Pennsylvania Republican, started to ask questions this summer about when the programs would end. He said he was worried that the Fed might overstep its boundaries and replace private lenders.After the election, other Republicans joined Mr. Toomey’s push to end the programs. Mr. Mnuchin announced on Nov. 19 that he believed Congress had intended for the five programs backed by the $454 billion Congress authorized to stop lending and buying bonds on Dec. 31. He closed them — while leaving a handful of mostly older programs open — and asked the Fed to return the money he had lent to the central bank.Business & EconomyLatest UpdatesUpdated Dec. 18, 2020, 12:25 p.m. ETLee Raymond, a former Exxon chief, will step down from JPMorgan Chase’s board.U.S. adds chip maker S.M.I.C. and drone maker DJI to its entity list.Volkswagen says semiconductor shortages will cause production delays.The Fed issued a statement saying it was dissatisfied with his choice, but agreed to give the money back.Democrats criticized the move as designed to limit the incoming Biden administration’s options. They began to discuss whether they could reclaim the funds and restart the programs once Mr. Biden took office and his Treasury secretary was confirmed, since Mr. Mnuchin’s decision to close them and claw back the funds rested on dubious legal ground.The new Republican move would cut off that option. Legislative language circulating early Friday suggested that it would prevent “any program or facility that is similar to any program or facility established” using the 2020 appropriation. While that would still allow the Fed to provide liquidity to Wall Street during a crisis, it could seriously limit the central bank’s freedom to lend to businesses, states and localities well into the future.In a statement, Senator Elizabeth Warren, Democrat of Massachusetts, called it an attempt to “to sabotage President Biden and our nation’s economy.”Mr. Toomey has defended his proposal as an effort to protect the Fed from politicization. For example, he said Democrats might try to make the Fed’s programs much more generous to states and local governments.The Treasury secretary would need to have the Fed’s approval to improve the terms to help favored borrowers. But the central bank might not readily agree, as it has generally approached its powers cautiously to avoid attracting political scrutiny and to maintain its status as a nonpartisan institution.Fed officials have avoided weighing in on the congressional showdown underway.“I won’t have anything to say on that beyond what we have already said — that Secretary Mnuchin, as Treasury secretary, would like for the programs to end as of Dec. 31” and that the Fed will give back the money as asked, Richard H. Clarida, the vice chairman of the Fed, said Friday on CNBC.More generally, he added that “we do believe that the 13-3 facilities” have been “very valuable.”Emily Cochrane More

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      In Praise of Janet Yellen the Economist

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      It’s hard to overstate the enthusiasm among economists over Joe Biden’s selection of Janet Yellen as the next secretary of the Treasury. Some of this enthusiasm reflects the groundbreaking nature of her appointment. She won’t just be the first woman to hold the job, she’ll be the first person to have held all three of the traditional top U.S. policy positions in economics — chair of the Council of Economic Advisers, chair of the Federal Reserve and now Treasury secretary.And yes, there’s a bit of payback for Donald Trump, who denied her a well-earned second term as Fed chair, reportedly in part because he thought she was too short.But the good news about Yellen goes beyond her ridiculously distinguished career in public service. Before she held office, she was a serious researcher. And she was, in particular, one of the leading figures in an intellectual movement that helped save macroeconomics as a useful discipline when that usefulness was under both external and internal assault.Before I get there, a word about Yellen’s time at the Federal Reserve, especially her time on the Fed’s board in the early 2010s, before she became chair.At the time, the U.S. economy was slowly clawing its way back from the Great Recession — a recovery impeded, not incidentally, by Republicans in Congress who pretended to care about national debt and imposed spending cuts that significantly hurt economic growth. But spending wasn’t the only issue of debate; there were also fierce arguments about monetary policy.Specifically, there were many people on the right condemning the Fed’s efforts to rescue the economy from the effects of the 2008 financial crisis. Among them, by the way, was Judy Shelton, the totally unqualified hack Trump is still trying to install on the Fed board, who warned in 2009 that the Fed’s actions would produce “ruinous inflation.” (Hint: They didn’t.)Even within the Fed, there was a division between “hawks” worried about inflation and “doves” who insisted that inflation wasn’t a threat in a depressed economy, and that fighting the depression should take priority. Yellen was one of the leading doves — and a 2013 analysis by The Wall Street Journal found that she had been the most accurate forecaster among Fed policymakers.Why did she get it right? Part of the answer, I’d argue, goes back to academic work she did in the 1980s.At the time, as I’ve suggested, useful macroeconomics was under attack. What I mean by “useful macroeconomics” was the understanding, shared by economists from John Maynard Keynes to Milton Friedman, that monetary and fiscal policy could be used to fight recessions and reduce their economic and human toll.This understanding didn’t fail the test of reality — on the contrary, the experience of the early 1980s strongly confirmed the predictions of basic macroeconomics.But useful economics was under threat.On one side, right-wing politicians turned away from reality-based economics in favor of crank doctrines, especially the claim that governments can conjure up miraculous growth by cutting taxes on the rich. On the other side, a significant number of economists themselves rejected any role for policy in fighting recessions, claiming that there would be no need for such a role if people were acting rationally in their own interests, and that economic analysis should always assume that people are rational.Which is where Yellen came in; she was a prominent figure in the rise of “new Keynesian” economics, which rested on one key insight: People aren’t stupid, but they aren’t perfectly rational and self-interested. And even a bit of realism about human behavior restores the case for aggressive policies to fight recessions. In later work Yellen would show that labor market outcomes depend a lot not just on pure dollars-and-cents calculations, but also on perceptions of fairness.All this may sound abstruse, but I can vouch from my own experience that this work had a huge impact on many young economists — basically giving them a license to be sensible.And it seems to me that there’s a direct line from the disciplined realism of Yellen’s academic research to her success as a policymaker. She was always someone who understood the value of data and models. Indeed, rigorous thinking becomes more, not less important in crazy times like these, when past experience offers little guidance about what we should be doing. But she also never forgot that economics is about people, who aren’t the emotionless, hyperrational calculating machines economists sometimes wish they were.Now, none of this means that things will necessarily go well. The race is not to the swift, neither yet bread to the wise, nor yet success to policymakers of understanding, but time and chance happen to them all. Trump’s cabinet was a clown show — possibly the worst cabinet in America’s history — but it wasn’t until 2020 that the consequences of the administration’s incompetence became fully apparent.Still, it’s immensely reassuring to know that economic policy will be made by someone who knows what she is doing.The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com.Follow The New York Times Opinion section on Facebook, Twitter (@NYTopinion) and Instagram. More