The emergency lending facilities rolled out by the Federal Reserve at the start of the pandemic threaten to set a dangerous precedent that will put pressure on the central bank to fund all manner of government projects — including even the “colonisation of Mars”, an outgoing top official has warned.
Randy Quarles, who is stepping down as a Fed governor this month, struck a cautious tone about the unprecedented support provided at the onset of the coronavirus crisis by the US central bank, which implemented a series of programmes to ensure the smooth flow of credit to households, business and local government.
Quarles said that the facilities put in place for the pandemic had “established the precedent that the Fed can lend to businesses and municipalities”, which would encourage those with grand plans and little patience for democracy to demand more action in the future.
“There will inevitably be those . . . who will begin to ask why the Fed can’t fund repairs of the country’s ageing infrastructure, or finance the building of a border wall, or purchase trillions of dollars of green energy bonds, or underwrite the colonisation of Mars,” said Quarles, a Donald Trump appointee who had served as one of Wall Street’s top watchdogs before his term expired in October.
In addition to slashing interest rates to zero and unveiling a massive bond-buying programme, the Fed rolled out 13 facilities under powers that allowed it to make asset purchases in “unusual and exigent circumstances” with the backing of US Treasury to cover any losses.
Overall usage of the programmes was low, with the Fed’s mere promise of action serving to calm investors.
But Quarles said the central bank’s willingness to wade into risky markets like corporate junk bonds and municipal debt “[breached] the long unbreachable firewall of offering direct lending to non-financial businesses”. If abused, it could bring “great” damage to the institution’s mission, he added at an event hosted by the American Enterprise Institute, a right-leaning think-tank.
Quarles reiterated his support for the Fed’s response to coronavirus, but warned that an institution unshackled from “congressional appropriations” would have the “vastest political consequence and political control of it would be a great prize”.
That would embolden “dangerous fiscal irresponsibility, and the attendant pressures would turn [the Fed] from a technocratic, non-political institution . . . into the most politically entangled organisation in the country,” he added.
If the Fed were ever forced to offer these kinds of facilities in the future, Quarles urged the central bank and Congress to transfer “without delay” all governance and funding-related issues into a “non-Fed vehicle” responsible for the management and eventual withdrawal of support.
In his remarks on Thursday, Quarles also suggested possible refinements to the rules and regulations guiding the largest financial institutions, including changes to the way banks are stress-tested and tweaks to the leverage requirements dictating how much capital lenders must hold.
He also urged policymakers to show “reasoned constraint” in regulating digital assets such as stablecoins.
Quarles drew significant criticism during his tenure for what progressive Democrats said was a dilution of the post-global financial crisis regulatory apparatus.
The Biden administration is now under pressure to fill the vacancy with someone much more stringent on Wall Street. Sarah Bloom Raskin, who previously served as a Fed governor and in senior positions at the Treasury department, is reportedly under consideration, as is Richard Cordray, former director of the Consumer Financial Protection Bureau and an ally of Democratic senator Elizabeth Warren.
