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| How the Fed’s Magic Money Machine Will Turn $454 Billion Into $4 Trillion | How the Fed’s Magic Money Machine Will Turn $454 Billion Into $4 Trillion |
| (about 4 hours later) | |
| Treasury Secretary Steven Mnuchin has a favorite talking point: With the Federal Reserve’s help, the government will turn a $500 billion spending package working its way through Congress into a $4 trillion booster shot for the United States economy. | Treasury Secretary Steven Mnuchin has a favorite talking point: With the Federal Reserve’s help, the government will turn a $500 billion spending package working its way through Congress into a $4 trillion booster shot for the United States economy. |
| How, you might ask, does that figure? | How, you might ask, does that figure? |
| The answer lies in the central bank’s emergency lending authorities, given to it by the Federal Reserve Act. When the Fed declares that circumstances are unusual and exigent, and Treasury signs off, it can set up special programs that essentially buy debt from — or extend loans to — businesses large and small. | The answer lies in the central bank’s emergency lending authorities, given to it by the Federal Reserve Act. When the Fed declares that circumstances are unusual and exigent, and Treasury signs off, it can set up special programs that essentially buy debt from — or extend loans to — businesses large and small. |
| The Fed could simply print the money to back that lending, but it avoids taking on credit risk, so it asks for Treasury funding to insure against losses. But those taxpayer dollars can be leveraged: Because the Fed expects most borrowers to pay back, it does not need one-for-one support. As a result, a mere $10 billion from Treasury can prop up $100 billion in Fed lending. And voilà — the $454 billion Congress dedicated to Fed programs in the aid bill can be multiplied many times. A separate $46 billion in the package will go to specific industries. | The Fed could simply print the money to back that lending, but it avoids taking on credit risk, so it asks for Treasury funding to insure against losses. But those taxpayer dollars can be leveraged: Because the Fed expects most borrowers to pay back, it does not need one-for-one support. As a result, a mere $10 billion from Treasury can prop up $100 billion in Fed lending. And voilà — the $454 billion Congress dedicated to Fed programs in the aid bill can be multiplied many times. A separate $46 billion in the package will go to specific industries. |
| This is how the mechanics work and who might get the money: | This is how the mechanics work and who might get the money: |
| Congress allotted at least $454 billion to the Treasury specifically to support Fed programs. It attached a few strings — for instance, companies that get direct loans backed by Treasury funding could be prevented from paying out dividends or buying back shares. Mr. Mnuchin is also required to push the Fed to set up specific programs, including one that would help medium-sized businesses. | Congress allotted at least $454 billion to the Treasury specifically to support Fed programs. It attached a few strings — for instance, companies that get direct loans backed by Treasury funding could be prevented from paying out dividends or buying back shares. Mr. Mnuchin is also required to push the Fed to set up specific programs, including one that would help medium-sized businesses. |
| Another $46 billion in the legislation will go to specific industries, including airlines. The Fed won’t be involved in that set of loans. | Another $46 billion in the legislation will go to specific industries, including airlines. The Fed won’t be involved in that set of loans. |
| The Treasury and the Fed will work together to decide how the $454 billion should be deployed. The central bank designs and runs the programs, but Treasury consults on the broad-brush outline and must sign off on any plan. | The Treasury and the Fed will work together to decide how the $454 billion should be deployed. The central bank designs and runs the programs, but Treasury consults on the broad-brush outline and must sign off on any plan. |
| The Fed has already announced a number of emergency lending programs in recent weeks, including one that supports corporate debt issuers and another meant to keep money flowing in the market for short-term business loans. It has said it will establish a “Main Street” lending facility for small businesses, though details on what that will look like are scant. | The Fed has already announced a number of emergency lending programs in recent weeks, including one that supports corporate debt issuers and another meant to keep money flowing in the market for short-term business loans. It has said it will establish a “Main Street” lending facility for small businesses, though details on what that will look like are scant. |
| The Fed is also indirectly helping the market for local debt through one facility, and some economists have speculated that it could go further by actually buying state and local bonds in an emergency measure. The legislation instructs Mr. Mnuchin to push for a program that supports state and local borrowing, something lawmakers have long clamored for. | The Fed is also indirectly helping the market for local debt through one facility, and some economists have speculated that it could go further by actually buying state and local bonds in an emergency measure. The legislation instructs Mr. Mnuchin to push for a program that supports state and local borrowing, something lawmakers have long clamored for. |
| The Treasury fund used to back those efforts contains just $94 billion, so congressionally-approved money would pave the way for serious scaling up. | The Treasury fund used to back those efforts contains just $94 billion, so congressionally-approved money would pave the way for serious scaling up. |
| Depending on how much the money is leveraged — which in turn depends on the credit risk of the programs it supports — it could result in trillions of temporary support for companies and local governments. Mr. Mnuchin has repeatedly estimated the injection at about $4 trillion. (It could be bigger now: When he made that estimate, the congressional allotment was $425 billion.) | Depending on how much the money is leveraged — which in turn depends on the credit risk of the programs it supports — it could result in trillions of temporary support for companies and local governments. Mr. Mnuchin has repeatedly estimated the injection at about $4 trillion. (It could be bigger now: When he made that estimate, the congressional allotment was $425 billion.) |
| It is worth noting that this setup will not necessarily pump $3.5 trillion of monopoly money into the economy permanently. | It is worth noting that this setup will not necessarily pump $3.5 trillion of monopoly money into the economy permanently. |
| When it makes a loan, the Fed temporarily sends fresh dollars out into the financial system. But that loan must be paid back with interest, sucking the funds back out. When the Fed buys bonds using its emergency powers, it takes an asset out of the system in exchange for central bank cash. | When it makes a loan, the Fed temporarily sends fresh dollars out into the financial system. But that loan must be paid back with interest, sucking the funds back out. When the Fed buys bonds using its emergency powers, it takes an asset out of the system in exchange for central bank cash. |
| “When it comes due, cash essentially has to be taken out of the private banking system and given back to the Fed,” said Matthew Luzzetti, chief United States economist at Deutsche Bank. | “When it comes due, cash essentially has to be taken out of the private banking system and given back to the Fed,” said Matthew Luzzetti, chief United States economist at Deutsche Bank. |
| That said, money can be hard to fully snuff out once it is created. The Fed swelled its asset holdings significantly during and after the 2008 financial crisis. It struggled to shrink them again, leaving outstanding reserves — central bank deposits that it had used to buy bonds — permanently higher. | That said, money can be hard to fully snuff out once it is created. The Fed swelled its asset holdings significantly during and after the 2008 financial crisis. It struggled to shrink them again, leaving outstanding reserves — central bank deposits that it had used to buy bonds — permanently higher. |
| The Fed is legally prohibited from lending to bankrupt companies, and it avoids lending to risky businesses without backup. That’s partly because it is afraid of losing money on loans and facing political repercussions, lawyers who study the matter say. | The Fed is legally prohibited from lending to bankrupt companies, and it avoids lending to risky businesses without backup. That’s partly because it is afraid of losing money on loans and facing political repercussions, lawyers who study the matter say. |
| That may seem silly. The Fed is no ordinary bank: It creates money at the touch of a digital button. If it is not paid back, it will not go out of business. But if it took a significant loss, it would mean that the central bank had tried to prop up failing companies rather than simply striving to improve market functioning amid a temporary cash crunch. Keeping the gears of commerce chugging is the Fed’s job. Picking winners and losers is not. | That may seem silly. The Fed is no ordinary bank: It creates money at the touch of a digital button. If it is not paid back, it will not go out of business. But if it took a significant loss, it would mean that the central bank had tried to prop up failing companies rather than simply striving to improve market functioning amid a temporary cash crunch. Keeping the gears of commerce chugging is the Fed’s job. Picking winners and losers is not. |
| “Losses look really, really bad,” Kathryn Judge, a professor at Columbia Law School, said in an email. “Most people are comfortable with the Fed providing liquidity, even a lot of it, to keep markets functioning.” | “Losses look really, really bad,” Kathryn Judge, a professor at Columbia Law School, said in an email. “Most people are comfortable with the Fed providing liquidity, even a lot of it, to keep markets functioning.” |
| If the Fed does take on a risk but Treasury backs at least the first round of losses, it means the elected government is agreeing to the plan. That puts a veneer of accountability on the whole enterprise, giving unelected central bankers some cover. | If the Fed does take on a risk but Treasury backs at least the first round of losses, it means the elected government is agreeing to the plan. That puts a veneer of accountability on the whole enterprise, giving unelected central bankers some cover. |
| Updated June 5, 2020 | Updated June 5, 2020 |
| So far, the evidence seems to show it does. A widely cited paper published in April suggests that people are most infectious about two days before the onset of coronavirus symptoms and estimated that 44 percent of new infections were a result of transmission from people who were not yet showing symptoms. Recently, a top expert at the World Health Organization stated that transmission of the coronavirus by people who did not have symptoms was “very rare,” but she later walked back that statement. | |
| A study by European scientists is the first to document a strong statistical link between genetic variations and Covid-19, the illness caused by the coronavirus. Having Type A blood was linked to a 50 percent increase in the likelihood that a patient would need to get oxygen or to go on a ventilator, according to the new study. | A study by European scientists is the first to document a strong statistical link between genetic variations and Covid-19, the illness caused by the coronavirus. Having Type A blood was linked to a 50 percent increase in the likelihood that a patient would need to get oxygen or to go on a ventilator, according to the new study. |
| The unemployment rate fell to 13.3 percent in May, the Labor Department said on June 5, an unexpected improvement in the nation’s job market as hiring rebounded faster than economists expected. Economists had forecast the unemployment rate to increase to as much as 20 percent, after it hit 14.7 percent in April, which was the highest since the government began keeping official statistics after World War II. But the unemployment rate dipped instead, with employers adding 2.5 million jobs, after more than 20 million jobs were lost in April. | The unemployment rate fell to 13.3 percent in May, the Labor Department said on June 5, an unexpected improvement in the nation’s job market as hiring rebounded faster than economists expected. Economists had forecast the unemployment rate to increase to as much as 20 percent, after it hit 14.7 percent in April, which was the highest since the government began keeping official statistics after World War II. But the unemployment rate dipped instead, with employers adding 2.5 million jobs, after more than 20 million jobs were lost in April. |
| Mass protests against police brutality that have brought thousands of people onto the streets in cities across America are raising the specter of new coronavirus outbreaks, prompting political leaders, physicians and public health experts to warn that the crowds could cause a surge in cases. While many political leaders affirmed the right of protesters to express themselves, they urged the demonstrators to wear face masks and maintain social distancing, both to protect themselves and to prevent further community spread of the virus. Some infectious disease experts were reassured by the fact that the protests were held outdoors, saying the open air settings could mitigate the risk of transmission. | Mass protests against police brutality that have brought thousands of people onto the streets in cities across America are raising the specter of new coronavirus outbreaks, prompting political leaders, physicians and public health experts to warn that the crowds could cause a surge in cases. While many political leaders affirmed the right of protesters to express themselves, they urged the demonstrators to wear face masks and maintain social distancing, both to protect themselves and to prevent further community spread of the virus. Some infectious disease experts were reassured by the fact that the protests were held outdoors, saying the open air settings could mitigate the risk of transmission. |
| Exercise researchers and physicians have some blunt advice for those of us aiming to return to regular exercise now: Start slowly and then rev up your workouts, also slowly. American adults tended to be about 12 percent less active after the stay-at-home mandates began in March than they were in January. But there are steps you can take to ease your way back into regular exercise safely. First, “start at no more than 50 percent of the exercise you were doing before Covid,” says Dr. Monica Rho, the chief of musculoskeletal medicine at the Shirley Ryan AbilityLab in Chicago. Thread in some preparatory squats, too, she advises. “When you haven’t been exercising, you lose muscle mass.” Expect some muscle twinges after these preliminary, post-lockdown sessions, especially a day or two later. But sudden or increasing pain during exercise is a clarion call to stop and return home. | Exercise researchers and physicians have some blunt advice for those of us aiming to return to regular exercise now: Start slowly and then rev up your workouts, also slowly. American adults tended to be about 12 percent less active after the stay-at-home mandates began in March than they were in January. But there are steps you can take to ease your way back into regular exercise safely. First, “start at no more than 50 percent of the exercise you were doing before Covid,” says Dr. Monica Rho, the chief of musculoskeletal medicine at the Shirley Ryan AbilityLab in Chicago. Thread in some preparatory squats, too, she advises. “When you haven’t been exercising, you lose muscle mass.” Expect some muscle twinges after these preliminary, post-lockdown sessions, especially a day or two later. But sudden or increasing pain during exercise is a clarion call to stop and return home. |
| States are reopening bit by bit. This means that more public spaces are available for use and more and more businesses are being allowed to open again. The federal government is largely leaving the decision up to states, and some state leaders are leaving the decision up to local authorities. Even if you aren’t being told to stay at home, it’s still a good idea to limit trips outside and your interaction with other people. | States are reopening bit by bit. This means that more public spaces are available for use and more and more businesses are being allowed to open again. The federal government is largely leaving the decision up to states, and some state leaders are leaving the decision up to local authorities. Even if you aren’t being told to stay at home, it’s still a good idea to limit trips outside and your interaction with other people. |
| Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks. | Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks. |
| Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days. | Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days. |
| If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.) | If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.) |
| Taking one’s temperature to look for signs of fever is not as easy as it sounds, as “normal” temperature numbers can vary, but generally, keep an eye out for a temperature of 100.5 degrees Fahrenheit or higher. If you don’t have a thermometer (they can be pricey these days), there are other ways to figure out if you have a fever, or are at risk of Covid-19 complications. | Taking one’s temperature to look for signs of fever is not as easy as it sounds, as “normal” temperature numbers can vary, but generally, keep an eye out for a temperature of 100.5 degrees Fahrenheit or higher. If you don’t have a thermometer (they can be pricey these days), there are other ways to figure out if you have a fever, or are at risk of Covid-19 complications. |
| The C.D.C. has recommended that all Americans wear cloth masks if they go out in public. This is a shift in federal guidance reflecting new concerns that the coronavirus is being spread by infected people who have no symptoms. Until now, the C.D.C., like the W.H.O., has advised that ordinary people don’t need to wear masks unless they are sick and coughing. Part of the reason was to preserve medical-grade masks for health care workers who desperately need them at a time when they are in continuously short supply. Masks don’t replace hand washing and social distancing. | The C.D.C. has recommended that all Americans wear cloth masks if they go out in public. This is a shift in federal guidance reflecting new concerns that the coronavirus is being spread by infected people who have no symptoms. Until now, the C.D.C., like the W.H.O., has advised that ordinary people don’t need to wear masks unless they are sick and coughing. Part of the reason was to preserve medical-grade masks for health care workers who desperately need them at a time when they are in continuously short supply. Masks don’t replace hand washing and social distancing. |
| If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others. | If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others. |
| If you’re sick and you think you’ve been exposed to the new coronavirus, the C.D.C. recommends that you call your healthcare provider and explain your symptoms and fears. They will decide if you need to be tested. Keep in mind that there’s a chance — because of a lack of testing kits or because you’re asymptomatic, for instance — you won’t be able to get tested. | If you’re sick and you think you’ve been exposed to the new coronavirus, the C.D.C. recommends that you call your healthcare provider and explain your symptoms and fears. They will decide if you need to be tested. Keep in mind that there’s a chance — because of a lack of testing kits or because you’re asymptomatic, for instance — you won’t be able to get tested. |
| While the $46 billion in Treasury-determined funding will go to specific industries, the Fed-tied money is likely to be used more broadly. | While the $46 billion in Treasury-determined funding will go to specific industries, the Fed-tied money is likely to be used more broadly. |
| So far, the Fed’s emergency programs benefit wide groups: The Fed is buying high-grade corporate bonds, for instance, because such debt had become hard to issue or renew, threatening to choke off funding to a broad range of companies. | So far, the Fed’s emergency programs benefit wide groups: The Fed is buying high-grade corporate bonds, for instance, because such debt had become hard to issue or renew, threatening to choke off funding to a broad range of companies. |
| The goal is to keep critical markets functioning through the coronavirus crisis. | The goal is to keep critical markets functioning through the coronavirus crisis. |
| “The government has stepped into the breach in a dramatic way, and has made Treasury the Federal Reserve’s deputy,” said Peter Conti-Brown, a Fed historian at the Wharton School of the University of Pennsylvania. “The Federal Reserve has become your friendly neighborhood loan officer.” | “The government has stepped into the breach in a dramatic way, and has made Treasury the Federal Reserve’s deputy,” said Peter Conti-Brown, a Fed historian at the Wharton School of the University of Pennsylvania. “The Federal Reserve has become your friendly neighborhood loan officer.” |
| Since you asked. When we say that the Fed “essentially” buys debt and makes loans with its emergency lending programs, it’s because the way many of the operations are structured is a bit complicated. | Since you asked. When we say that the Fed “essentially” buys debt and makes loans with its emergency lending programs, it’s because the way many of the operations are structured is a bit complicated. |
| Legally, the Fed is not allowed to buy debt that is not backed by the government, but in emergencies it can do so as long as it secures its purchases. To achieve a degree of separation, it sets up a special purpose vehicle and then lends into it — with a layer of money from Treasury providing the needed security. The vehicle then snaps up bonds or makes loans to the private sector. | Legally, the Fed is not allowed to buy debt that is not backed by the government, but in emergencies it can do so as long as it secures its purchases. To achieve a degree of separation, it sets up a special purpose vehicle and then lends into it — with a layer of money from Treasury providing the needed security. The vehicle then snaps up bonds or makes loans to the private sector. |
| It’s also worth noting that it is a big deal in the wonky world of central banking that Congress is poised to explicitly give the Fed so much backup. | It’s also worth noting that it is a big deal in the wonky world of central banking that Congress is poised to explicitly give the Fed so much backup. |
| “I know of no other time that a legislature has delegated to a central bank such far-reaching authority to allocate credit,” Ms. Judge wrote in an email. | “I know of no other time that a legislature has delegated to a central bank such far-reaching authority to allocate credit,” Ms. Judge wrote in an email. |