What is 13-3? Why is a debate about the Fed holding up business talks?

Jeanna Smialek

When the markets collapsed in March, the Federal Reserve unveiled novel programs to help keep the flow of credit to states, midsize businesses, and large corporations. Congress presented Treasury Secretary Steven Mnuchin $ 454 billion to support the effort.

Nine months later, Senate Republicans are trying to ensure the same programs can’t be restarted after Mnuchin shut them down on December 31st. Aside from preventing their reincarnation under the Biden administration, Republicans are trying to fit language into a pandemic stimulus package that would limit the Fed’s powers in the future and potentially prevent them from borrowing in future crises Awards to companies and municipalities.

The last-minute move has drawn democratic anger and threatened the fate of relief laws that economists believe are badly needed as households and businesses stare at a dark winter pandemic. Here’s an overview of how the Fed’s lending powers work, and how the Republicans are trying to change them.

The Fed can keep the flow of credit when conditions are really bad.

The most important and well-known job of the Fed is to set interest rates as a guide for the economy. However, the central bank was founded in 1913 to avoid banking problems and financial panic – when people get nervous about the future and rush to withdraw their money from bank accounts and sell stocks, bonds, and other investments. Congress dramatically expanded the Fed’s powers to fight panic during the Great Depression, adding Section 13-3 to the Federal Reserve Act.

The section allows the Fed to act as the lender of last resort in “unusual and urgent” circumstances – in short, when markets are not functioning normally because investors are extremely concerned. The central bank used these powers extensively during the 2008 crisis to support politically unpopular bailouts by financial companies. Congress then changed the Fed’s powers to require the Treasury Department’s blessing to introduce new emergency loan programs or to make significant changes to existing programs.

The programs offer confidence and credit.

During the 2008 crisis, the Fed served primarily as the true lender of last resort – it mainly assisted the various financial markets by offering to intervene when conditions got really bad.

The emergency loan programs for 2020 were far more extensive. Last time, the Fed focused on parts of Wall Street that most Americans know little about, like the commercial paper market and primary dealers. This time these measures were reintroduced, but new programs were also introduced to keep credit available in almost all parts of the economy. It has offered to buy municipal bonds, support bank loans to small and medium-sized businesses, and buy up corporate debt.

The comprehensive package was an answer to a real problem: many markets crashed in March. And the new programs generally worked. Although the terms were not very generous and relatively few companies, as well as state and local borrowers, took advantage of these new programs, their existence gave investors confidence that the central bank would prevent a financial collapse.

But in mid-November it got messy.

Most lawmakers agreed that the Fed and the Treasury Department did a good job of reopening credit markets and protecting the economy. But Senator Patrick Toomey, a Republican from Pennsylvania, began asking questions this summer about when the programs would end. He said he was concerned that the Fed might push its limits and replace private lenders.

After the election, other Republicans joined Toomey’s push to end the programs. Mnuchin announced on Nov. 19 that he believed Congress had earmarked for the five programs backed by the $ 454 billion Congress, which was allowed 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’d loaned to the central bank.

The Fed made a statement that it was dissatisfied with his election but agreed to return the money.

Democrats criticized the move to limit the possibilities of the new Biden government. They began to debate whether they could reclaim the funds and restart the programs once President-elect Joe Biden took office and his Treasury Secretary was confirmed, as Mnuchin’s decision to close it and reclaim the funds was based on dubious legal grounds .

The new Republican move would cut that option off. Legislative language circulated early Friday suggested “any program or facility similar to an established program or facility” be banned with the 2020 funds. While this would still allow the Fed to provide liquidity to Wall Street during a crisis, it could continue to seriously limit the central bank’s freedom to lend to corporations, states and local governments.

In a statement, Massachusetts Democrat Senator Elizabeth Warren called it an attempt to “sabotage President Biden and our nation’s economy.”

Toomey defended his proposal to protect the Fed from politicization. For example, he said Democrats could try to make the Fed’s programs much more generous to states and local governments.

The Treasury Secretary would need the approval of the Fed to improve terms and help beneficiary borrowers. The central bank could not readily agree, however, as it has generally approached its powers cautiously to avoid political scrutiny and to maintain its status as a bipartisan institution.

Fed officials have avoided incriminating the ongoing showdown in Congress.

“I will have nothing more to say about this than what we have already said – that Secretary Mnuchin, as Treasury Secretary, wants the programs to end by December 31st,” and that the Fed will return the money as requested, Richard Clarida, Vice-Chair the Fed said on Friday on CNBC.

More generally, he added that “we believe the 13-3 facilities” were “very valuable”.