Mnuchin Cites Principles in Clawing Back Fed Money. Democrats See Politics.

But the Congressional Budget Office, in assessing the budget impact of the money dedicated to Fed programs, found it to be nearly free of cost. The idea was that the loans the money backed would eventually be returned, and fees and interest earnings would cover any expenses. So if the money is clawed back and repurposed for spending — not lending — it would add toward the deficit for accounting purposes.

Market distortions have always been a concern.

Top Republicans have suggested that leaving the programs operational for too long could distort markets, which is a genuine concern with such backstops. In his letter announcing his intent to close the programs, Mr. Mnuchin noted that normal market conditions prevail.

It’s true that corporate bond issuance has been rapid and states and localities are able to fund themselves at low rates. But virus cases are also spiking, suggesting that conditions could worsen and Fed backstops might again be needed.

Over the summer, Mr. Mnuchin agreed to extend the programs until Dec. 31 at a time when coronavirus infections were much lower than they are today, markets were functioning well, and companies were issuing bonds at breakneck speed.

Democrats say the move was political. Republicans applaud it.

Treasury’s move to claw back the funding limits Mr. Biden. The Fed and the next Treasury secretary can use the Exchange Stabilization Fund to back up bond purchases and business lending.

But it contains much less money than the government would have had with the congressional appropriation. That could hamper a goal that had been percolating among Democrats: to restart the programs, make them more generous and use them as a backup option if additional stimulus was tough to get through Congress.

Senator Mitch McConnell of Kentucky, the majority leader, said the request to end the programs and return the money was “fully aligned with the letter of the law and the intent of the Congress.”

Democrats reacted with outrage.

“It is clear that Trump and Mnuchin are willing to spitefully destroy the economy and make it as difficult as possible for the incoming Biden Administration to turn this crisis around and lead the nation to a recovery,” Representative Maxine Waters of California said in a letter.

Jim Tankersley contributed reporting.

Article source: https://www.nytimes.com/2020/11/20/business/economy/mnuchin-fed-covid.html