The Fed’s $ 4 trillion lifeline never materialized. Here’s why.

WASHINGTON » As companies furloughed millions of workers and stock prices plunged through late March, Treasury Secretary Steven Mnuchin offered a glimmer of hope: The government was about to step in with a $ 4 trillion bazooka.

The scope of that promise hinged on the Federal Reserve. The relief package winding through Congress at the time included a $ 454 billion pot of money earmarked for the Treasury to back Fed loan programs. Every one of those dollars could, in theory, be turned into as much as $ 10 in loans. Emergency powers would allow the central bank to create the money for lending; it just required that the Treasury insure against losses.

It was a shock- and- awe moment when lawmakers gave the package a thumbs- up. Yet in the months since, the planned punch has not materialized.

The Treasury has allocated $ 195 billion to back Fed lending programs, less than half of the allotted sum. The programs supported by that insurance have made just $ 20 billion in loans, far less than the suggested trillions.

The programs have partly fallen victim to their own success: Markets calmed as the Fed vowed to intervene, making the facilities less necessary as credit began to flow again. They have also been undercut by Mnuchin’s fear of taking credit losses, limiting the risk the government was willing to take and excluding some would- be borrowers. And they have been restrained by reticence at the central bank, which has extended its authorities into new markets, including some — like midsize business lending — that its powers are poorly designed to serve. The Fed has pushed the boundaries on its traditional role as a lender of last resort but not far enough to hand out the sort of loans some in Congress had envisioned.

Lawmakers, President Donald Trump and administration officials are now clamoring to repurpose the unused funds, an effort that has taken on more urgency as the economic recovery slows and the chances of another fiscal package remain unclear. The various programs are set to expire Dec. 31 unless Mnuchin and Jerome Powell, the Fed chair, extend them.

Here’s how that $ 454 billion failed to turn into $ 4 trillion, and why the Fed and Treasury are under pressure to do more with the money.

The Fed can lend to private entities to keep markets functioning in times of stress, and in the early days of the crisis it rolled out a far- reaching set of programs meant to soothe panicked

investors.

But the Fed’s vast power comes with strings attached. Treasury must approve of any lending programs it wants to set up. The programs must lend to solvent entities and be broad- based, rather than targeting one or two individual firms. If the borrowers are risky, the Fed requires insurance from either the private sector or the Treasury Department.

Early in the crisis, the Treasury used existing money to back market- focused stabilization programs. But that funding source was finite, and as Mnuchin negotiated with Congress, he pushed for money to back a broader spate of Fed lending efforts.

The central bank itself made a major announcement March 23, as the package was being negotiated. It said it was making plans to funnel money into a wide array of desperate hands, not just into Wall Street’s plumbing. Officials would set up an effort to lend to small and medium- size businesses, the Fed said, and another that would keep corporate bonds flowing. It would go on to expand that program to include some recently downgraded bonds, so- called fallen angels, and to add a bondbuying program for state and local governments.

Congress allocated $ 454 billion in support of the programs as part of the economic relief package signed into law March 27. When the Congressional Budget Office estimated the budget effects of that funding, it did not count the cost toward the federal deficit, since borrowers would repay on the Fed’s loans, and fees and earnings should offset losses.

Mnuchin and congressional leaders did not settle on that sum for a very precise economic reason, a senior Treasury official said, but they knew conditions were bad and wanted to go big.

Overdoing it would cost nothing, and the size of the pot allowed Mnuchin to say that the partners could pump “up to $ 4 trillion” into the economy.

It was like nuclear deterrence for financial markets: Promise that the government had enough liquidity- blasting superpower to conquer any threat, and people would stop running for safer places to put their money. Crisis averted, there would be no need to actually use the ammunition.

Still, the huge dollar figure stoked hopes among lawmakers and would- be loan recipients — ones that have been disappointed.

Key markets began to mend themselves as soon as the Fed promised to step in as a backstop. Companies and local governments have been able to raise funds by selling debt to private investors at low rates.

The Main Street program, the one meant to make loans to midsize businesses, is expected to see muted use even if conditions deteriorate again. In the program that buys state and local debt, rates are high, and payback periods are shorter than many had hoped.

Continued lobbying suggests if the programs were shaped differently, more companies and governments might use them.

The relatively conservative design owes to risk aversion on Mnuchin’s part: He was initially hesitant to take any losses and has remained cautious.