Pat Toomey andmission creep at the Federal Reserve

If you believe, sensibly, that Congress’ diminished — mostly self-diminished — role in governance is regrettable, you should regret that Sen. Pat Toomey is leaving the Senate in 2022, upon completion of his second term. Last week, the Pennsylvania Republican showed why he will be missed in an institution that has too few members concerned about its waning relevance.

In the end-of-session rush to produce more pandemic relief, Toomey forced attention to the Federal Reserve’s extraordinary mission creep, which seems certain to continue, and to exacerbate the eclipse of Congress. In the process, Toomey accomplished something unusual: the termination of a “temporary” federal program.

Last March, when Toomey was one of the Republicans negotiating the Senate’s version of the Cares Act’s emergency lending provisions, the first large pandemic relief package, there was reasonable fear that capital markets would freeze catastrophically. So, the Fed was given unprecedented authority to make subsidized loans to states, municipalities and corporations. Toomey sought a Sept. 30 termination of this program, and settled for Dec. 31. The program’s purpose was to restore normal functioning in private capital markets, not to be an ongoing, all-purpose means for the Fed to set the nation’s fiscal policy.

So, the House passed a bill commanding the Fed to make essentially interest-free loans (10 years at 0.25% interest) to municipalities without their having to demonstrate an inability to get credit elsewhere. As Toomey says, the Fed would not be, as intended in March, the “lender of last resort” but would be the lender of first resort, forever. This, even though the fiscal crisis ended many months ago.

If such a crisis recurs, the Fed can come back to Congress — imagine: involving itself in governing — for renewal of the lending program. Meanwhile, and in the wake of $500 billion made available to states, municipalities and corporations in March, moral hazard — incentivizing perverse behavior — would flourish. Toomey notes that New Jersey, which has been economically battered by pandemic-related economic shutdowns, nevertheless just increased government spending 4%.

While Toomey was rescuing the Fed from an essentially political role, the Fed was embracing another, potentially enormous one: It joined the Network of Central Banks and Supervisors for Greening the Financial System.

Until 1977, the Fed’s mandate was price stability (preserving the currency as a store of value). Since then, the “dual mandate” had included promotion of maximum sustainable employment. Now, however, the Fed will somehow 1) anticipate long-term climate change (even though in 2007 it did not anticipate the 2008 financial crisis) and 2) divine how this will affect the financial system and, inevitably, 3) consider how to affect the climate by considering corporations’ climate-relevant behavior before buying corporate debt.

The Fed will discover that it cannot remain independent of what it has waded waist-deep into: politics. And Congress will be content to slough off yet another policy responsibility.

Toomey’s 2022 departure from Capitol Hill is yet another instance of a depressing phenomenon: Those who are least inclined to stay in Congress are often those who could do the most to contribute to its revival.