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The Year the Fed Changed Forever

WASHINGTON — As Jerome H. Powell, the Federal Reserve chair, rang in 2020 in Florida, where he was celebrating his son’s wedding, his work life seemed to be entering a period of relative calm. President Trump’s public attacks on the central bank had eased up after 18 months of steady criticism, and the trade war with China seemed to be cooling, brightening the outlook for markets and the economy.Yet the earliest signs of a new — and far more dangerous — crisis were surfacing some 8,000 miles away. The novel coronavirus had been detected in Wuhan, China. Mr. Powell and his colleagues were …

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

As 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 …

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

WASHINGTON — Treasury Secretary Steven Mnuchin broke sharply with the Federal Reserve this week, choosing to end a variety of programs aimed at helping markets, businesses and municipalities weather the pandemic and asking the central bank to return the funds earmarked to support those efforts.

Mr. Mnuchin said his decision was driven by a deference to what he believed was Congress’s intent when it allocated the funding, a desire to repurpose the money toward better uses and a belief that markets no longer needed them. But his actions, which will limit the incoming Biden administration’s ability to use those programs at scale, seem driven by politics.

“The law is very clear,” Mr. Mnuchin said in an interview on CNBC Friday. He defended his decision and suggested that the programs were no longer needed, because market conditions “are in great shape.”

But that view is not shared by the Fed, which quickly issued a statement expressing disappointment with the decision, calling the economy “still-strained and vulnerable.” It is worth noting that Mr. Mnuchin only publicly took the position that Congress meant for the programs to end after Dec. 31 once it became clear that President Trump had lost the election to Joseph R. Biden Jr.

By ending the programs — which have been funneling loans to medium-sized businesses and backstopping municipal and corporate bond markets — Mr. Mnuchin is taking away a source of economic support just as the new administration comes into office and as rising virus cases dog the recovery. By asking the Fed to return the money that enables the emergency efforts, he could make it harder for Democrats to restart them at a large scale and on more generous terms.

Chair Jerome H. Powell indicated the Fed would return the funds, in a letter to Mr. Mnuchin on Friday afternoon.

“It’s not just closing the store down for Biden,” said Ernie Tedeschi, a policy economist at Evercore ISI. “It’s burning the store down.”

Mr. Biden’s transition team criticized the move as trying to hamstring his ability to help the economy.

“The Treasury Department’s attempt to prematurely end support that could be used for small businesses across the country when they are facing the prospect of new shutdowns is deeply irresponsible,” Kate Bedingfield, a spokeswoman for the transition, said in a statement.

Mr. Mnuchin’s decision came as a surprise to Mr. Trump, who was alerted to the decision shortly before Mr. Mnuchin’s letter was released on Thursday and who, on Friday morning, expressed some concern that the move could have a negative impact on the stock market, according to a person familiar with the matter who was not authorized to speak publicly. Asked if Mr. Trump had instructed Mr. Mnuchin to end the programs, Mr. Mnuchin’s spokeswoman said that it was “solely a Treasury decision based on what the law and congressional intent required.”

Here is a rundown of how these programs work, why Mr. Mnuchin says he is killing them, and why his arguments leave unanswered questions.

Mr. Mnuchin is pulling the plug on a set of Fed emergency lending programs, which the central bank can use to keep credit flowing in times of crisis. After the 2008 recession, Congress insisted that the Treasury secretary sign off on such efforts.

The Fed is loath to take credit losses, so Treasury has been providing a layer of money to cover any loans or purchases that go bad. It initially used the Exchange Stabilization Fund, a pot of unused money. But in March, Congress beefed up the Treasury’s capacity.

Mr. Mnuchin and lawmakers earmarked $454 billion to support Fed lending when they cut a deal on a government pandemic response package. The Fed can make money out of thin air, and it only needs a little bit of backing — $1 of insurance can be turned into as much as $10 in bond buying or business loans. The programs offered a big potential bang for the government’s buck.

Mr. Mnuchin ultimately earmarked $195 billion for specific loan programs. Not much of that capacity has been used. Some programs calmed market conditions merely by reassuring investors. The small and medium-sized business loan program had restrictive terms.

When Mr. Mnuchin said Thursday that he would end the five appropriation-backed programs at the end of 2020, he asked the Fed to give back all but $25 billion, which he is leaving to support already-made loans and bond purchases.

Mr. Mnuchin has said “it is very clear in the law” that the allocation-backed programs must end Dec. 31. That is not true.

The law states that the Treasury should not hand out money from its $454 billion pot after the end of 2020 — but it allows already-dedicated funds to remain available. Because the Treasury had handed hundreds of billions of dollars in insurance money to the Fed, the central bank theoretically has lots of capacity left to make loans and buy bonds.

The Fed’s lawyers have interpreted the law to mean that they can keep the programs running into 2021, supported by the existing Treasury backstop, as the central bank’s statement on Thursday indicated.

Mr. Mnuchin himself had previously suggested that the programs could be extended past the end of the year, writing in an October letter that the decision would hinge on market conditions.

A Treasury spokeswoman said on Friday that Mr. Mnuchin had always believed Congress meant for the funding to sunset, and had planned to use Exchange Stabilization Fund money — plus the $25 billion that he is leaving with the Fed to cover existing loans — to extend the programs if needed.

That logic is hard to follow given Mr. Mnuchin’s belief that the law prevents new Fed lending backed by Congress’s money after Dec. 31. If that’s the case, it should also prevent new lending against the $25 billion, which comes from the same congressional pot, said Peter Conti-Brown, a lawyer and Fed historian at the University of Pennsylvania.

Mr. Mnuchin also suggested that taking back the earmarked money would allow Congress to reroute it to other purposes in ways that “won’t cost taxpayers any more money.”

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.

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.

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.

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Mnuchin Plans to End Some Emergency Fed Facilities

WASHINGTON — Treasury Secretary Steven Mnuchin said he does not plan to extend several key emergency lending programs beyond the end of the year and asked the Federal Reserve to return the money supporting them, a decision that could hinder President-elect Joseph R. Biden Jr.’s ability to use the central bank’s vast powers to cushion the economic fallout from the virus.

Mr. Mnuchin on Thursday said he would not continue Fed programs, including ones that support the markets for corporate bonds and municipal debt and one that extends loans to midsize businesses. The emergency efforts expire at the end of 2020, but investors had expected some or all of them to be kept operational as the virus continues to pose economic risks.

The pandemic-era programs are run by the Fed but use Treasury money to insure against losses. They have provided an important backstop that has calmed critical markets since the coronavirus took hold in March. Removing them could leave significant corners of the financial world vulnerable to the type of volatility that cascaded through the system as virus fears mounted in the spring.

By asking the Fed to return unused funds, Mr. Mnuchin could prevent Mr. Biden’s incoming Treasury secretary from quickly restarting the efforts at scale in 2021.

“The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy,” the central bank said in a statement.

The emergency programs were backed by $454 billion that Congress appropriated in March as part of a broader pandemic response package. Because of the way the Fed’s emergency lending powers work, Jerome H. Powell, the Fed chair, needs the Treasury secretary’s signoff to make major changes to the programs’ terms. Extending the end date counts as one of those changes that need approval.

The decision to close the various programs and remove the funding appeared to come as a surprise to the Fed, which received a letter announcing the Treasury’s desire to claw the money back on Thursday afternoon.

“I am requesting that the Federal Reserve return the unused funds to the Treasury,” Mr. Mnuchin said in the letter. He noted that he had been “personally involved in drafting the relevant part of the legislation” and believed it was Congress’s intent that the programs stop at the end of the year.

Earlier this month, Mr. Powell had said the central bank and Treasury were just beginning to discuss whether to extend the programs.

Mr. Mnuchin did agree to extend other emergency loan programs that are not backed by the congressional appropriation, including ones that service the short-term market for corporate debt, one for money market funds, and one that backstops government small-business loans.

The Fed avoids taking credit losses when extending loans, and throughout the pandemic crisis it has asked for Treasury backup for its riskier programs. If it returns any unused money that the Treasury has already dedicated to support the programs, as Mr. Mnuchin requested, the Biden administration will have less financial backup to restart the programs.

That’s because the congressional appropriation — $195 billion of which has been earmarked to specific Fed programs — cannot be used to make new loans after the end of the year. But while the law prohibits the Treasury from putting money into the Fed’s facilities after 2020, it does not obviously prevent the Fed from using already-earmarked Treasury funding to insure its own loans and bond purchases.

“The loans, loan guarantees and investing that the Treasury does is the applicable language,” said Peter Conti-Brown, a lawyer and Fed historian at the University of Pennsylvania. He said that while it may be possible to read the law as preventing new Fed loans, that is not the “obvious reading.”

The Fed and the next Treasury secretary do have an alternative to continue the programs: They could use money in the Treasury’s Exchange Stabilization Fund, which still contains about $74 billion in uncommitted funds, to back the programs. It is unclear exactly how much of the fund can be used, but the programs have not to date needed substantial capacity.

Mr. Mnuchin’s move could leave the government with fewer options to help the economy just as the new administration takes office.

“Treasury is right that a limited set of objectives have been achieved in terms of stabilizing bond markets,” Jason Furman, a prominent Democratic economist, said on Twitter. “But what is the downside to continuing them as insurance against worse developments?”

Many of the Fed’s programs, including one that buys state and local debt and another that encourages banks to lend to small- and midsize businesses, have been lightly used. But that is because they were designed as backstops — meaning that borrowers would likely only use them when times are bad.

And it is Mr. Mnuchin himself who has been conservative in setting the program’s terms. With a more permissive head at the Treasury, the terms could have been made more generous.

In fact, Democrats had been eyeing both the municipal bond-buying program and the Main Street lending effort for small- and medium-size businesses as potential backup options if it proves difficult to pass additional government relief. Without them, businesses and state and local governments would have one less potential source of help.

With coronavirus cases on the rise, the economy may sour again, making the programs more necessary. As recently as Tuesday, Mr. Powell warned of the potential for economic scarring and said that the economic recovery had “a long way to go.” But Treasury officials have expressed optimism that the economy is poised for a steady rebound and that the likely rollout of a vaccine by the end of the year further improves the economic picture.

Senator Patrick J. Toomey, Republican of Pennsylvania, who had been pushing Mr. Mnuchin to end the programs, applauded the decision.

“These temporary facilities helped to both normalize markets and produce record levels of liquidity,” Mr. Toomey said in a statement. “Congress’s intent was clear: These facilities were to be temporary, to provide liquidity, and to cease operations by the end of 2020.”

Treasury’s move prompted concern from Democrats, some of whom said the Fed should simply refuse to return the money — a route it is unlikely to take.

Bharat Ramamurti, a Democrat who sits on the congressional oversight body in charge of reviewing the various Fed and Treasury programs, suggested on Twitter that, legally, the Fed was under no obligation to give back the funds.

“Under its contracts with Treasury, the Fed can and should reject the request,” he said. “While Secretary Mnuchin claims congressional intent was to halt all new loans at year-end, the text of the CARES Act doesn’t say that. At a minimum, the Fed can continue to make loans using the $195 billion in equity Treasury has already committed.”

Emily Cochrane contributed reporting.

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How the Wealthy World Has Failed Poor Countries During the Pandemic

LONDON — Like much of the developing world, Pakistan was alarmingly short of doctors and medical facilities long before anyone had heard of Covid-19. Then the pandemic overwhelmed hospitals, forcing some to turn away patients. As fear upended daily life, families lost livelihoods and struggled to feed themselves.

On the other side of the world in Washington, two deep-pocketed organizations, the World Bank and the International Monetary Fund, vowed to spare poor countries from desperation. Their economists warned that immense relief was required to prevent a humanitarian catastrophe and profound damage to global prosperity. Emerging markets make up 60 percent of the world economy, by one I.M.F. measure. A blow to their fortunes inflicts pain around the planet.

Wages sent home to poor countries by migrant workers — a vital artery of finance — have diminished. The shutdown of tourism has punished many developing countries. So has plunging demand for oil. Billions of people have lost the wherewithal to buy food, increasing malnutrition. By next year, the pandemic could push 150 million people into extreme poverty, the World Bank has warned, in the first increase in more than two decades.

But the World Bank and the I.M.F. have failed to translate their concern into meaningful support, say economists. That has left less-affluent countries struggling with limited resources and untenable debts, prompting their governments to reduce spending just as it is needed to bolster health care systems and aid people suffering lost income.

“A lost decade of growth in large parts of the world remains a plausible prospect absent urgent, concerted and sustained policy response,” concluded a recent report from the Group of 30, a gathering of international finance experts, including Lawrence Summers, a former economic adviser to President Barack Obama, and Treasury secretary in the Clinton administration.

The wealthiest nations have been cushioned by extraordinary surges of credit unleashed by central banks and government spending collectively estimated at more than $8 trillion. Developing countries have yet to receive help on such a scale.

The I.M.F. and the World Bank — forged at the end of World War II with the mandate to support nations at times of financial distress — have marshaled a relatively anemic response, in part because of the predilections of their largest shareholder, the United States.

During a virtual gathering of the two organizations this month, the U.S. Treasury secretary, Steven Mnuchin, urged caution. “It is critical that the World Bank manage financial resources judiciously,” he said, “so as not to burden shareholders with premature calls for new financing.”

The World Bank is headed by David Malpass, who was effectively an appointee of President Trump under the gentlemen’s agreement that has for decades accorded the United States the right to select the institution’s leader. A longtime government finance official who worked in the Trump administration’s Treasury Department, he has displayed contempt for the World Bank and the I.M.F.

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Credit…Erik S Lesser/EPA, via Shutterstock

“They spend a lot of money,” Mr. Malpass said during congressional testimony in 2017. “They’re not very efficient. They’re often corrupt in their lending practices.”

Under his leadership, the World Bank has required that borrowers deregulate domestic industry to favor the private sector as a condition for loans.

“There is an ideological attitude here, a more conservative attitude of, ‘Well, it’s going to be money that goes to waste,’” said Scott Morris, a senior fellow at the Center for Global Development. In the midst of a crisis caused not by profligacy but by a pandemic, he added, “that’s a very wrongheaded attitude.”

World Bank officials said the institution had expanded lending at a historic pace, while defending Mr. Malpass’s demand for tighter conditions on loans as responsible stewardship. “He wants to have good country outcomes,” said Axel van Trotsenburg, the World Bank’s managing director of operations. “He wants to make sure that the programs reach people.”

The I.M.F. is run by a managing director, Kristalina Georgieva, a Bulgarian economist who previously worked at the World Bank. She is answerable to the institution’s shareholders. The Trump administration has resisted calls to expand the I.M.F.’s reserves, arguing that most of the benefits would flow to wealthier countries.

In April, as worries about poor countries intensified, world leaders issued elaborate promises for help.

“The World Bank Group intends to respond forcefully and massively,” Mr. Malpass said. At the I.M.F., Ms. Georgieva said she would not hesitate to tap the institution’s $1 trillion lending capacity. “This is, in my lifetime, humanity’s darkest hour,” she declared.

But the I.M.F. has lent out only $280 billion. That includes $31 billion in emergency loans to 76 member states, with nearly $11 billion going to low-income countries.

“We have really stepped up in terms of quick disbursement to be able to support countries that are in need,” Ceyla Pazarbasioglu, director of the I.M.F.’s Strategy Policy and Review department, said in an interview.

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Credit…Fayaz Aziz/Reuters

The World Bank more than doubled its lending over the first seven months of 2020 compared with the same period a year earlier, but has been slow to distribute the money, with disbursements up by less than a third over that period, according to research from the Center for Global Development.

The limited outlays by the I.M.F. and the World Bank appear to stem in part from excessive faith in a widely hailed initiative that aimed to relieve poor nations of their debt burdens to foreign creditors. In April 2020, at a virtual summit of the Group of 20, world leaders agreed to pause debt payments through the end of the year.

World leaders played up the program as a way to encourage poor countries to spend as needed, without worrying about their debts. But the plan exempted the largest group of creditors: the global financial services industry, including banks, asset managers and hedge funds.

“The private sector has done zilch,” said Adnan Mazarei, a former deputy director at the I.M.F., and now a senior fellow at the Peterson Institute for International Economics in Washington. “They have not participated at all.”

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Credit…Francis Kokoroko/Reuters

Concerns about developing countries’ debts rested atop the reality that many were spending enormous shares of their revenues on loan payments even before the pandemic.

Since 2009, Pakistan’s payments to foreign creditors have climbed to 35 percent of government revenues from 11.5 percent, according to data compiled by the Jubilee Debt Campaign, which advocates for debt forgiveness. Ghana’s payments swelled to more than 50 percent of government revenues from 5.3 percent.

As the pandemic spread, Pakistan raised health care spending but cut support for social service programs as it prioritized debt payments.

The debt suspension was at best a short-term reprieve, delaying loan payments while heaping them atop outstanding bills.

Some 46 countries, most of them in sub-Saharan Africa, have collectively gained $5.3 billion in relief from immediate debt payments. That is about 1.7 percent of total international debt payments due from all developing countries this year, according to data compiled by the European Network on Debt and Development.

Mr. Summers recently described the debt suspension initiative as “a squirt gun meeting a massive conflagration.”

But the program has proved powerful in one regard: It conveyed a sense that the troubles of the poorest countries have been contained.

“Part of the reason why so little has been done is that there was a misguided expectation that you could provide all the support low-income countries needed simply by deferring payments on their debts,” said Brad Setser, a former U.S. Treasury official and now a senior fellow at the Council on Foreign Relations in New York.

This month, the G20 extended the program into the middle of next year. Ms. Georgieva has chided private creditors for remaining on the sidelines.

Private creditors have been reluctant to offer debt suspension in part because of uncertainty over who will reap the benefits. Many developing countries have borrowed aggressively from Chinese institutions in a process both opaque and uncoordinated. If American or European institutions forgo collecting on their debts, the money may simply be passed on to a Chinese lender rather than lifting health care spending.

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Credit…Saiyna Bashir for The New York Times

Private creditors maintain that poor countries have not requested relief, recognizing that credit rating agencies may treat debt suspension as a default — a status that jeopardizes their future ability to borrow.

“They don’t want to lose the market access,” said Clay Lowery, executive vice president of research and policy at the Institute of International Finance, a trade association representing financial companies around the world.

But that fear has been actively fomented by creditors, discouraging poor countries from seeking relief.

“The private sector is often highly misleadingly aggressive in suggesting that debt restructuring will cut countries off forever, and that complying with its wishes will get them new money very soon,” Mr. Summers said in an interview.

Some argue that anything short of debt restructuring, in which terms are renegotiated and creditors absorb losses on loans, merely extends the pain — for borrowers and lenders alike.

Critics of the I.M.F. say its handling of the pandemic has displayed the same trait that has long defined its mission — a bias toward ensuring that creditors get paid, even at the expense of wrenching spending cuts in poor countries.

Since the pandemic began, the I.M.F. has allocated $500 million to cover the costs of debt suspension, while handing out more than $100 billion in fresh loans. More than $11 billion from the loan proceeds has paid off private creditors, according to a report from the Jubilee Debt Campaign.

“International financial institutions are going to leave countries in much worse shape than they were before the pandemic,” said Lidy Nacpil, coordinator of the Asian Peoples’ Movement on Debt and Development, a Manila-based alliance of 50 organizations. “Their interest is not primarily about these countries getting back on their feet, but to get these countries back into the business of borrowing.”

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