Fed’s mission creep

WASHINGTON — 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.

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 fiscal wrecks, largely because their alliances with government- employee unions have produced crushing pension and other obligations. Second, Democrats envisioned the Fed as an open- ended and almost unlimited source of money to achieve public-sector and private- sector goals they could not achieve through Congress. Democrats were practicing Emanuelism. (Rahm Emanuel: “You never want a serious crisis to go to waste.” Because it is an “opportunity to do things that you think you could not do before.”)

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%. All state politicians would prefer to rely not on their states’ taxing authority but on the Fed.

Corporations, too, wish the Fed’s subsidized loans could flow forever. Never mind that the essence of socialism is government allocation of society’s basic economic resource: capital. Which means government allocation of opportunity. Which means the bitter politics of high- stakes distributional conflict.

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.

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.

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.