Mnuchin’s Fed move is like stripping Titanic of its lifeboats, economist says

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U.S. Treasury Secretary Steve Mnuchin leaves the office of Senate Majority Leader Mitch McConnell at the U.S. Capitol in Washington, DC on September 30, 2020.

Nicholas Kamm | AFP | Getty Images

US Treasury Secretary Steven Mnuchin’s decision to allow the expiry of the main emergency programs in the event of a pandemic It’s like removing the lifeboats from the Titanic, according to Carl Weinberg, chief economist at High Frequency Economics.

Mnuchin announced Thursday that he would not extend the Federal Reserve’s emergency loan programs that used congressional CARES law funds beyond December 31. This move is expected to significantly reduce the central bank’s ability to consolidate the financial system.

The announcement comes as many parts of the country reimplement partial lockdown restrictions in a bid to contain the resurgence of the coronavirus. the seven-day national average of new daily infections reached 161,165, according to CNBC analysis of data from Johns Hopkins University, 26% more than a week ago. California has ordered a 22-hour curfew across much of the state, while New York City has announced school closures.

Speaking to CNBC’s “Squawk Box Europe” on Friday, Weinberg suggested that it was difficult to find an “economic rationale” for the decision, with millions of Americans still receive unemployment benefits, the Fed’s regional indicators are easing and more closures are on the horizon.

“I don’t think there is a good economic or public health or social reason as to why they want to cut these programs at this time, so that has to be political, right?” Weinberg said.

The Fed and the US Chamber of Commerce have expressed public opposition to Mnuchin’s move, the latter suggesting that it “prematurely and unnecessarily ties the hands” of President-elect Joe Biden’s new administration.

When asked whether the cutback in emergency programs was justified given that only 3% of the $ 2.6 trillion in available funds is being used, Weinberg compared the situation to the Titanic.

“One of the problems was that there weren’t enough lifeboats on board and then none of those lifeboats were in use when the boat left the dock, but when you needed them they were not there, ”he said.

“These are the lifeboats for the economy, these are the places businesses can go when there is no place to go, whether they are small or medium-sized businesses, not the big ones that can access the financial markets, but the smallest. “

Mnuchin extended three programs that did not use CARES Act funds for 90 days, including facilities that supported commercial paper and money markets. About $ 25 billion of treasury equity will also be left to the Fed from the CARES Act funds, while the Treasury has about $ 50 billion in the Exchange Stabilization Fund.

Sources close to the decision told CNBC on Thursday that Mnuchin or a new Treasury secretary under the Biden administration may choose to revive emergency lending programs by establishing a new deal with the Fed.

Weinberg also warned that despite general market optimism over hopes for a vaccine and a possible economic recovery, there is still “potential for a financial crisis lurking behind” the economy.

“In the United States, at the end of December, people are going to lose their eviction protection, they are going to lose income support, they are going to lose forbearance on student loans, and as we fall into this tax valley of support for people, we are going to see failures, and those failures as we learned in 2008 can create problems within the financial sector, ”he said, adding that the crisis was still in it. at its beginnings “.

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