Pat Toomey and the Fed’s mission creep

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.

Inthe end-of-session rush to produce more pandemic relief, Mr. 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, Mr. Toomey accomplished something unusual: the termination of a “temporary” federal program.

Last March, when Mr. 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. Mr. 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.

This autumn, however, armed with a legal interpretation that the deadline was not binding, Democrats sought to exploit the pandemic as a political opportunity. By indefinitely extending the Fed’s lending program, they could achieve two goals unrelated to the pandemic:

First, they could bail out Democratic-run states and municipalities that, long before the pandemic, were first resort, forever. This, fiscal wrecks, largely because even though the fiscal crisis their alliances with governmentended many months ago.employee unions have If such a crisis recurs, the produced crushing pension Fed can come back to Congress and other obligations. — imagine: involving Second, Democrats envisioned itself in governing — for renewal the Fed as an openended of the lending program. and almost unlimited Meanwhile, and in the source of money to achieve wake of $500 billion made public-sector and private-sector available to states, municipalities goals they could not and corporations in achieve through Congress. March, moral hazard — incentivizing Democrats were practicing perverse behavior Emanuelism. ( Rahmbehavior — would flourish. Mr. Emanuel: “You never want a Toomey notes that New Jersey, serious crisis to go to waste.” which has been economically Because it is an “opportunity battered by pandemicrelated to do things that you think economic shutdowns, you could not do before.”) nevertheless just increased

So, the House passed a bill government spending commanding the Fed to 4%. All state politicians make essentially interestfree would prefer to rely not on loans (10 years at 0.25% their states’ taxing authority interest) to municipalities but on the Fed. without their having to Corporations, too, wish the demonstrate an inability to Fed’s subsidized loans could get credit elsewhere. As Mr. flow forever. Never mind that Toomey says, the Fed would the essence of socialism is government not be, as intended in March, allocation of society’s the “lender of last resort” basic economic resource: but would be the lender of capital. Which means government allocation of opportunity. Which means the bitter politics of high-stakes distributional conflict.

While Mr. 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 theFinancial 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.

Presumably the Fed will ponder, for example, the probability of financial institutions’ asset prices changing because of severe weather events. The Fed’s ability to know these things is between negligible and nonexistent. But the Fed’s temptation to use its lending to dictate climate-friendly behavior to borrowers, and the political pressure from Congress to do so, will be between strong and irresistible.

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.

Mr.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.