The Capital Letter: Week of November 16

Treasury Secretary Steven Mnuchin said he would allow several emergency Federal Reserve lending programs to expire, opening a divide with the central bank, which had pressed for an extension.

As a result, on Dec. 31 several novel Fed programs that have backed corporate credit and municipal-borrowing markets and that have provided loans to small and midsize businesses and nonprofits during the coronavirus pandemic will end.

The emergency programs created by the Cares Act, the stimulus President Donald Trump signed earlier this year, were set to expire at year-end. Mnuchin is seeking to end the primary and secondary market corporate credit facilities, the Municipal Liquidity Facility, the Main Street Lending Program and the Term Asset-Backed Securities Loan Facility…

The secretary sought a 90-day extension for the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Money Market Mutual Fund Liquidity Facility and the Paycheck Protection Program Liquidity Facility.

In a letter to Fed Chairman Jerome Powell released to the public after markets closed Thursday, Mr. Mnuchin said the programs “have clearly achieved their objectives.”

Credit markets, which nearly froze in March as the pandemic triggered a financial shock, have been rehabilitated, Mr. Mnuchin said. “Banks have the lending capacity to meet the borrowing needs of their corporate, municipal and nonprofit clients,” he said.

The central bank signaled disappointment in his decision. “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy,” the Fed said in a statement.

Mr. Powell had indicated in remarks Tuesday that he didn’t think it would be appropriate to allow the programs to expire. “When the right time comes, and I don’t think that time is yet or very soon, we will put those tools away,” he said.

Fears that markets were being left without a backstop were overblown because the Fed’s short-term funding facilities would remain in place and others could be reactivated from existing Treasury resources without congressional approval. “I consider that to be a pretty good bazooka,” he said.

But [Mnuchin said] “for companies that are impacted by Covid — such as travel, entertainment and restaurants — they don’t need more debt, they need more PPP money, they need more grants,” he added, referring to the small-business lending program known as the Paycheck Protection Program. He also suggested the funding could be used to extend unemployment insurance.

The headline unemployment rate has fallen to 6.9%, but that significantly understates the current situation. Note that the headline unemployment rate was 3.5% at the end of 2019.

“We don’t need this money to buy corporate bonds, we need this money to go help small businesses that are still closed, or hurt through no fault of their own. For people who are going to be on unemployment, and unemployment is running out,” he said.

In October 2020, NASA’s Planetary Science and Astrobiology Decadal Survey committee received a manifesto from its Equity, Diversity and Inclusion Working Group (EDIWG). Written by NASA Ames Research Center public-communications specialist Frank Tavares — along with a group of eleven co-authors including noted activists drawn from the fields of anthropology, ethics, philosophy, decolonial theory, and women’s studies — and supported by a list of 109 signatories, “Ethical Exploration and the Role of Planetary Protection in Disrupting Colonial Practices” lacks technical merit. It is, nevertheless of great clinical interest, as it brilliantly demonstrates how the ideologies responsible for the destruction of university liberal-arts education can be put to work to abort space exploration as well.

With praiseworthy clarity as to their bias and intent, the EDIWG authors say that human space exploration must be stopped because it represents a continuation of the West’s tradition of resource development through free enterprise. “All of humanity is a stakeholder in how we, the planetary science and astrobiology community, engage with other worlds,” they say. “Violent colonial practices and structures — genocide, land appropriation, resource extraction, environmental devastation, and more — have governed exploration on Earth, and if not actively dismantled, will define the methodologies and mindsets we carry forward into space exploration. . . . It is critical that ethics and anticolonial practices are a central consideration of planetary protection. We must actively work to prevent capitalist extraction on other worlds, respect and preserve their environmental systems, and acknowledge the sovereignty and interconnectivity of all life.”

The EDIWG authors are equally clear as to the means by which human space exploration and development can be stopped: the “planetary protection” bureaucracy . . .

But what if Mars should prove to be lifeless, could we settle it then? Sorry, no dice. “Even if there is no extant microbial life on Mars or beyond, we must consider the impacts of our actions on geological timescales,” they say. “A human presence on an astrobiologically significant world could disrupt evolutionary processes already in place. What moral obligation do we have towards potential future life that our presence on Mars could impact, or to hybrid forms of life that our presence could potentially create? These questions must be addressed by planetary protection policy.”

Despite ongoing political turmoil and a worsening public-health crisis, Americans can rejoice in their nation’s triumphs in space. On Sunday, November 15, NASA’s Crew-1 mission successfully launched into orbit. Atop a SpaceX Falcon 9 rocket, three NASA astronauts and one JAXA astronaut began a 27-hour journey to the International Space Station, where they will spend the next six months. At 11:01 p.m. Eastern on Monday, SpaceX’s Crew Dragon spacecraft, dubbed Resilience, docked to the International Space Station.

This was the first mission of NASA’s Commercial Crew Program. So far, it’s a smashing success, and it demonstrates how private enterprise is transforming access to orbit. SpaceX is leading the charge to bring market forces into outer space. . . .

The successful partnership between NASA and SpaceX gives us plenty of reasons to be optimistic about the future of U.S. space activities. Although government will not be the main player as it was in decades past, it still has an invaluable role to play. Even with NASA outsourcing transport to the private sector, it’s still poised to make important strides in exploration and pure science. Furthermore, international law requires that states monitor their nationals in space, to ensure fair and equal access to orbit and beyond. With the governments of the spacefaring nations acting as celestial referees, we can expect exciting things from commercial space companies in coming years. And contrary to increasingly popular declinist narratives, the U.S. will be at the forefront of mankind’s second sustained push into the final frontier.

Since the Cape Coral restaurant opened in 1998, it’s weathered tropical storms and hurricanes, including Hurricane Irma, which clobbered most of the Florida peninsula in 2017. It’s survived the Great Recession, the BP oil spill, and the abrupt end to its 2018 summer tourism season when local waters were fouled with algae blooms and red tide.

Then in March came COVID-19, and government-mandated shutdowns. Bubba’s reopened when it was allowed, but business is still slow. The restaurant won’t turn a profit in 2020.

But it’s not hurricanes or algae or a global pandemic that have owner Jay Johnson worried about the future of his business. It’s the passage of a constitutional amendment by Florida voters earlier this month that will increase the state’s minimum wage to $15 an hour, and likely blow a massive hole in his restaurant’s already tight budget.

The state’s hospitality industry, which relies heavily on tipped employees and young workers learning basic job skills, will be hit particularly hard by the wage increases.

To survive, some restaurateurs are contemplating prices increases, staff cuts, payroll changes, and incorporating more technology. Others are pondering just shuttering their doors . . .

[S]imilar to the new banking rules that were passed after the subprime crisis, let’s require 50 percent clawbacks of federal-loan money from a college if its students don’t repay loans. If they default, students will still be on the hook for 50 percent themselves. And if a college thinks a defaulting former student could still repay the full amount, let the college go after the student for the other 50 percent. Second, colleges should lose their charitable status and no longer be tax-exempt. Third, wealthy colleges with massive endowments should be taxed like the hedge funds that they are.

[T]he GOP needs to head off the increasingly dangerous power in the hands of the largest asset managers. These asset managers possess enormous amounts of capital on behalf of clients who invest in mutual funds and exchange-traded funds. In turn, these managers are in the process of forming “cultural trusts,” by which they use their shareholder-voting power to impose leftist values on corporate America and on America as a whole through corporate America. The kinds of people that impose speech codes and harass conservatives on campuses are not content with only controlling college kids; they want it all.

Woke capitalist asset managers should not be America’s social dictators. These firms should be stripped of the right to vote their shares, which should either be voted by the individual investors who ultimately own them or not be voted at all, leaving corporate control to shareholders who own their corporate shares directly.

Returning to a fixed-exchange-rate system as Shelton has advocated would be inflationary as well. During several debates in the 1950s and 1960s with Bob Mundell (a mentor of Shelton’s who has consistently supported fixed exchange rates), Friedman argued that keeping exchanges rates fixed would necessarily force prices to adjust to correct exchange-rate imbalances (if the price of lumber in Canada increases, so must prices in the U.S. as the U.S.-Canadian dollar exchange rate could no longer adjust appropriately). Indeed, Friedman won on floating exchange rates as well. Friedman even once criticized one of Judy Shelton’s pro-fixed-exchange rate articles saying, “it would be hard to pack more error into so few words.”

That Shelton understands the strengths of the gold standard makes her more suited to serve in an important role, not less. Knowing how alternative monetary systems work can give us a better perspective on our own and make it easier to improve it.

As for her credentials, it’s true that Shelton doesn’t have the typical background of a monetary policymaker. But so what? Economists, of all people, should understand that credentials are an input into being a capable policymaker, but what matters is output. And apparently there are multiple ways of producing that output: The current Fed chairman, Jerome Powell, has a legal and banking background, not an academic background. That didn’t stop the smart set from lauding him as the “world’s best bureaucrat.” Of course, Powell’s degrees are from Princeton and Georgetown, whereas Shelton’s are from Portland State and the University of Utah. It reflects poorly on economic policymakers to engage in such obvious status-based discrimination.

Finally, we come to the only valid argument against Shelton: Her views on monetary policy suddenly changed from the Obama administration to the Trump administration. When Barack Obama was president, Shelton was a monetary hawk. But under President Trump, she has become much more dovish. To the extent that this shift suggests deference to the president who nominated her, it is indeed worrying. But it’s nowhere near as worrying as it was before the election. After all, Trump lost. Come January, he’s gone. It’s hard to see how Trump can pressure Shelton from Mar-a-Lago.

While the chairman of the Fed has incredible power to determine monetary policy, the other members of the Board matter, too. The Board is a deliberative body, and we should want a wide range of views represented to stave off insularity and groupthink. Shelton’s contrarian views would ensure that the Board confronted hard questions head on. Rather than impede effective monetary policy, Shelton would improve it by raising the level of debate and discussion. Given the Fed’s utterly unimpressive record since the 2008 financial crisis, an outsider perspective is just what we need. That’s why Shelton should be confirmed.

The Fed, especially in recent years, has prized collegiality and consensus. If Shelton reverts to her earlier views once confirmed, she might exert a gravitational pull toward a tighter policy than the economy needs. The best argument against that concern is that her recent statements make her unpredictable rather than doctrinaire. That is not a recommendation for a part of the government that requires sober and steady judgment above all.

Coloradans like their relatively low taxes, they support their flat income tax, and they support the right granted them in their Taxpayer’s Bill of Rights (TABOR) to vote on tax increases. Their approval of Propositions 116 and 117 reaffirmed as much. So did their rejection of an initiative to repeal the state’s flat income tax in favor of a progressive graduated income tax, which would have increased tax revenues by $2 billion annually.

Despite opponents’ mounting a multimillion-dollar campaign — funded primarily by out-of-state donors — to confuse voters on these measures, Coloradans remained supportive of conservative tax policy. The tax-cut proposition benefited from very simple ballot language and support from our Democratic governor. The simple and honest message — amplified by organizations such as the Independence Institute, Colorado Rising Action, and Americans for Prosperity–Colorado — appealed to voters in every corner of the state. Indeed, pushing back against the deceptive negative propaganda of the Left proved successful.

If Coloradans maintain such strong support for conservative tax policy, why did they [also] approve three measures that will massively increase taxes?

Voters were not sold on these as tax increases and did not vote for them because they were tax increases. Rather, they voted on the social outcomes that these measures promised to deliver. When it came to the tax changes, however, proponents did not tell Coloradans the whole story in clear and honest terms.

The pharmaceutical industry is on a bit of a hot streak. Last Monday, Pfizer announced promising results for its coronavirus vaccine. Later that day, Eli Lilly received emergency-use authorization from the FDA for its antibody treatment, which may prevent COVID-19 from growing serious in patients who contract the coronavirus and are not yet hospitalized. Not to be outdone, Moderna released similarly positive results for its vaccine candidate yesterday.

And yet, Republicans and Democrats alike are sitting on proposals that would make breakthroughs like these much rarer.

Specifically, they’re moving to peg domestic drug prices to the lower prices in other developed nations, a tactic known as “reference pricing.” Doing so, they claim, would save patients and taxpayers billions of dollars.

But reference pricing is a terrible idea . . .

Bernie Sanders has described pharmaceutical companies as “crooks” who are “literally killing people every day.” So I guess we have some pretty nefarious characters to thank for the unprecedentedly rapid development of safe and effective vaccines that promise to bring the COVID-19 pandemic to an end. These innovative companies have invested years of work and billions of dollars that put them in a position to create new vaccines in record time.

It normally takes ten years or more to develop new vaccines for novel viruses. But now, only ten months after China identified the hitherto unknown SARS-CoV-2 virus responsible for COVID-19 and shared its genetic sequence, 53 COVID-19 vaccines created by a variety of new and old vaccine-making techniques are being tested in humans in 18 countries. Eleven of these are in the most advanced stage of trials (Phase 3).

Two private companies have just announced promising results in their ongoing trials. On November 16, Moderna, based in Cambridge, Mass., announced that preliminary data show its COVID-19 vaccine is 95 percent effective. A week earlier New York based Pfizer with its German partner BioNTech announced their vaccine is 90 percent effective in preventing COVID-19 in a preliminary analysis. Today Pfizer announced final results indicating that its vaccine is 95 percent effective and causes only rare and mild side effects. It was effective for different races, ethnic groups, and ages — unlike many older vaccines that do not work well in the elderly, the Pfizer m-RNA vaccine was 94 percent effective in people over 65, the group at highest risk for severe COVID-19 illness and death. Pfizer plans on seeking emergency-use authorization within days. Neither the Moderna nor the Pfizer trial has reported severe side effects.

Progressing from discovery of a novel virus to safe and effective vaccines utilizing a new technology in just ten months demonstrates the innovative power of the private market to discover, develop, and deliver life-saving new products. The regulation and price controls Bernie Sanders and his fellow travelers prefer would destroy the incentives and profits needed for continued innovation and leave us unprepared for the next pandemic.

On average, Democratic states experienced larger total COVID-19 losses than did Republican states (22 percent vs. 16 percent). This difference was driven by Democratic states’ having larger health-related losses (11 percent vs. 5 percent) as opposed to economic losses (11 percent for both groups) . . .

The higher mortality observed in Democratic states could be because they were affected first and did not benefit from subsequent innovations in disease prevention and treatment. For example, efforts to safeguard older Americans, who account for about 85 percent of COVID-19 mortality, may have improved later in the pandemic. For example, many of the recent therapeutics were not used earlier in the pandemic. Democratic states also generally have higher population density, which facilitates disease transmission, although we find density contributes little differences in mortality. The heavier loss of life in Democratic states is particularly surprising given that public-health measures such as distancing and consistent mask use were more heavily enforced in those states.

The limited economic impact of more-stringent lockdowns may not extend to the second half of 2020. If Americans desire to resume economic activity, restrictions preventing them from doing so could reduce economic growth. Although aggregate GDP, released just before the election, beat expectations for the third quarter, state GDP data are not available. However, projecting third-quarter GDP by states based on recent changes in their unemployment levels, we find similar overall results as those shown here. We therefore predict third-quarter data on state GDP levels and mortality to show Democratic states having larger total losses than Republican states.

Since March, we have argued that a better strategy than harsh lockdowns would be to implement policies designed to ensure low mortality but high growth, specifically by protecting high-risk individuals, such as the elderly, while allowing low-risk youth to drive the economic recovery. Members of the public-health community are coming around to this view, as seen in the Great Barrington Declaration. Going forward, a vaccination effort focused on the elderly would be a key component of this strategy.

While the economic hit due to COVID-19 was similar across states in the first half of 2020, overall losses were not. Lockdowns did not amplify GDP losses, but it is unclear whether they saved lives. Armed with this finding, research into why Democratic states have experienced larger losses could save lives.

[S]ome are urging Joe Biden to forgive student debt by executive order, which is both bad policy and legally questionable.

But it might also be a useful bargaining chip for the Democrats: If Republicans agree to a somewhat bigger chunk of COVID relief than they’ve offered thus far, breaking the logjam on that issue, Democrats should agree to rewrite the executive branch’s statutory authority to “compromise, waive, or release” student loans. Republicans would get a high-profile win by shutting down this option (though it might never have been exercised anyway), while Democrats would get more of their priorities on COVID relief.

Then again, I have a conflict of interest here. I think another round of COVID relief and killing off a potential student-debt “jubilee” are both wins.

Like VerBruggen, I would like to see a relief bill passed as soon as possible, but the truth of the matter is that Democrats appear unwilling to pass anything remotely reasonable until Joe Biden takes the oath of office. For political purposes, Nancy Pelosi and Chuck Schumer will not budge from their $2.2 trillion HEROES Act and have refused to even consider the Trump administration’s offer of a $1.8 trillion compromise bill. I don’t see the merit in preventing the implementation of a student-loan-forgiveness plan that can potentially be reversed in court by backing an irreversible spending bill that will bail out irresponsible, unsustainable pension plans put in place by Democratic legislatures in blue states while handing out tax breaks to wealthy residents of those same states.

A student-debt cancellation is also a bald handout to the affluent. The Brookings Institution has looked into who holds student debt and who would stand to benefit from a cancellation along the lines Schumer mentions. Even when you begin lowering the available debt relief to those earning over $125,000 a year — as Senator Warren’s plan does — about 65 percent of the relief would go to households with incomes in the top forty percent nationally; only 14 percent would go to households in the bottom 40 percent.

It is also an insult to people who made other career and life decisions. Two-thirds of Americans don’t go to college. A number of them might, instead of taking out student loans for a degree of marginal value, instead take out a loan on a truck for work. Or they might have signed a lease for a storefront or workshop to launch their enterprise. They are also likely hurting in an economy wrecked by a pandemic and political gridlock. Why should the government give yet another preferment to investment in upgrading the human capital of the affluent, over the capital investments of other entrepreneurs and workers?

It shouldn’t.

The Committee for a Responsible Federal Budget has a great breakdown of why this is so. There are layers upon layers of problems with forgiving student debt to boost the economy, especially during the short term in light of COVID-19.

First and most obviously, debt is paid off in installments, sometimes over the course of several decades. So forgiving $X in debt today reduces payments by far less than $X in the near term. Some people might spend more today because their overall debt burden is lower, but research suggests this effect is small.

Second, if the debt relief is taxed (which will hinge on the government’s interpretation of obscure tax statutes), the extra taxes will cut into even this short-term boost.

Third, when you want to inject money into the economy, you give it to the folks most likely to spend an extra dollar . . .

On Monday, Bloomberg broke the news that Venezuela’s president Maduro is inching toward official dollarization. He has ordered the Banco Central de Venezuela to engage in discussions with Venezuelan bankers on the modalities of creating a clearing and settlement system in U.S. dollars. Maduro, in a rare display of good judgment, is taking a necessary step toward what I have been advocating for many years: official dollarization in Venezuela.

Unlike the opposition leader Juan Guaidó, who has been recognized as interim president by the United States, the European Union, and others, Maduro has finally received the message about the only way to stop Venezuela’s hyperinflation immediately. If he continues on this path, he will smash hyperinflation and remain in the saddle.

[T]he hope that China would liberalize as it was integrated into an ever-more-connected world has been dashed on the rocks of geopolitical reality. Instead, Beijing has emerged as an economic and military rival to the United States while remaining unwaveringly committed to authoritarianism. And it does so while exploiting the global system to improve its position at the expense of liberal states, most notably the U.S. One way it does this is by leveraging its array of and control over strategic minerals.

Today, U.S. dependence on these strategic materials poses a looming threat to America’s position in the world. The U.S. Departments of Defense and the Interior have deemed 35 minerals “critically important” to national security and the nation’s economy, including 17 minerals (rare-earth elements, or REEs) that are acutely important to the manufacture of missiles and munitions, hypersonic weapons, and radiation-hardened electronics, as well as such consumer goods as cellphones and catalytic converters in automobile engines. To cite just two examples, each F-35 fighter requires 920 pounds of REE, and each Virginia-class submarine needs ten times that amount.

U.S. dependence on strategic minerals is a result of the failure of U.S. policymakers to recognize the inability of free markets and free trade to address strategic issues . . .

Preliminary data suggest few Americans are actually fleeing cities. This means that housing shortages are not going away in America’s most in-demand metros, pushing up prices in places like Austin and preventing cities such as New York from becoming more affordable . . .

The shortage of housing in America’s major metros is expected to worsen in the next year. “The supply of homes is tighter than ever, and home prices are growing at the fastest rate in years,” said Taylor Marr, the lead economist at Redfin. Upwards of 23 million Americans are planning to move thanks to the flexibility of work from home, according to Upwork, with major cities like New York and San Francisco expected to take the biggest hit in large part due to high housing costs. There are also more people crowding into existing living spaces, turning them into dry tinder for deadly contagions. More young Americans live at home now than during the Great Depression, with more crowding occurring in major metros. And New York City’s high rates of unemployment have likely done little to alleviate the city’s 45 percent rise in severe overcrowding, defined as more than one-and-a-half people per bedroom, since 2005.

Two classes of American city should concern us: those like New York and San Francisco with severe, decades-long housing shortages resulting in a lack of affordability (worsened by today’s economic woes), and those like Austin or Sacramento where heightened demand outpaces the capacity to build. New York City built fewer housing units over the past decade than during the Great Depression, and rents are still historically high even after pandemic-fueled flight. Meanwhile, only 128 people on net were moving to the Austin metro area prior to this year, even as the city become the priciest housing market in Texas.

In both cases, unnecessary and burdensome regulatory barriers are stifling housing supplies as demand increases, pushing up the cost of housing. Local zoning rules and permitting regulations dictate what you can build, where you can build it, and who can live where. As a result, rents and home prices have been rising faster than incomes for the past two decades, particularly for cities with good job markets — a trend the pandemic has only worsened.

Biden brings a further layer of complexity to Britain’s Brexit challenge. Unlike Trump, he is broadly sympathetic toward the EU. He’s also proud of his Irish descent, and that puts the president-elect right at the center of the thorniest problem of them all, which is what Brexit means for Ireland. Brexit risks the return of a physical border separating Northern Ireland from the Republic. Part of the genius of the Good Friday Agreement was that, while allowing Northern Ireland to stay part of Britain, it removed all signs of a border between north and south. That way the loyalists could imagine themselves to be Brits while the nationalists could see themselves as living in a united Ireland.

Johnson’s failure to secure a post-Brexit deal with the EU (at least at the time of writing) jeopardizes that carefully struck balance, and Biden has made his view of this very clear. In a tweet in September, he wrote: “We can’t allow the Good Friday Agreement that brought peace to Northern Ireland to become a casualty of Brexit. Any trade deal between the US and UK must be contingent upon respect for the Agreement and preventing the return of a hard border. Period.” The message is clear — fix Brexit, don’t mess up Ireland, then we’ll talk trade.

Johnson was Trump’s man in Europe. Could he ever play the same role for Biden? Perhaps. After all, Johnson has the great advantage of not really believing in anything, which makes him very adaptable. Biden’s victory could make compromise with the EU seem more appealing for Johnson, especially now that his more extreme advisers have left Downing Street.

Sections of the Conservative Party would regard any compromise with Brussels as a betrayal. But the British electorate is suffering from political fatigue. The last five years have been a frantic dash from one self-induced crisis to the next. Britain had a general election in 2015, the Brexit vote in 2016, another general election in 2017, and then another general election in 2019, and now the final Brexit deadline is approaching at the end of this pandemic year ­— the whole thing has felt like government by whirlwind. It has to stop eventually, and the mere fact of Biden’s victory could help to bring a conclusion.

Johnson’s time as a populist has come to an end. That may help to resolve his immediate political problems (although a new, ambitious climate plan announced on Wednesday may take him into dangerous territory with some of his base) and endear him to the president-elect. But when the next election comes around, the people who voted for Brexit and who gave him a landslide victory in 2019 may not be so forgiving.

The use by central banks of an almost entirely bogus excuse (“risk”) for getting involved in the climate wars debases and degrades institutions that ought to be largely above the political fray. Instead, they are allowing themselves to be used as a device to push forward policies that, in a properly functioning democracy, ought to be debated and approved in the legislature.

Airlines want a bailout. If they need to change their argument to get one, they don’t mind doing so.

First, it was that they needed the money to keep their employees. Bailouts are also sold as being about workers, but in reality, they are about creditors and shareholders. Airline bailouts are no different. Once the first bailout was about to expire, airlines asked for another $25 billion so they wouldn’t have to furlough roughly 40,000 employees.

As my colleague Gary Leff and I explained here, once again the math didn’t add up . . .

Treasury Secretary Mnuchin on Thursday announced that the Fed’s corporate-credit, municipal-lending and Main Street Lending programs won’t be renewed on December 31. Democratic congressmen opposed the decision, misinterpreting it as an act of economic-policy tightening or a way to make life difficult for the incoming Biden administration. In fact, it’s a logical move to reappropriate much of the $454 billion in unused CARES Act funds for fiscal policy, such as an extension of the Payment Protection Program (PPP) for still-insolvent small businesses and an extension of enhanced unemployment insurance for people still out of work….

Given congressional gridlock over more fiscal stimulus, why not use the $454 billion already appropriated by the CARES Act to extend the expired Paycheck Protection Program (PPP)? It’s actually a crafty solution . . .

The real controversy now is not whether unused and unneeded emergency facilities can or should be allowed to expire — of course they can and should. The conversation instead ought to center on the role the Fed plays in times of crisis in our national economy. Its objective to serve as the “lender of last resort” is alive and well, and it should be so, though it is important that we not confuse “desired liquidity” for “desired price.” If we are going to have a country where we accept the role of a central bank in stabilizing market malfunctions, we have to have a limiting principle lest we end up with systemic mispricing of risk and subsequent misallocation of capital. Market dependency, after all, is a market malfunction, too. What does it mean to have the Fed be a lender of last resort, and what does it mean for the Fed to maintain market functioning across credit and money markets? It seems to me that this conversation is a more pressing one than the silly debate about these liquidity facilities. And yet it’s one we can’t have in the middle of a crisis, because all anyone wants to do is stop the bleeding.

Another question a serious Congress would address with the gift of hindsight is whether the so-called Volcker-rule provision of Dodd-Frank is doing more harm than good. The answer seems self-evident to those paying attention to capital markets, where banks are unable to make markets in corporate debt and municipal debt, necessitating these silly Fed facilities to begin with. Liquidity crises happen, but it should not be controversial to say that we clearly are not in a liquidity crisis now, and certainly not in these asset classes. Moreover, there’s a real question as to whether or not the liquidity crisis we did have at the start of the pandemic was self-created to begin with. The Volcker rule was a non-sequitur if there ever was one, blaming the poor capital reserves and excess leverage of banks that had fallen into the social cult of homeownership on the mere concept of proprietary investment. Market-making was never a systemic risk, and there is simply no way that the Fed’s liquidity measures would have been needed this past spring if banks had not been forbidden from participating in this silo of capital markets. Re-visiting the Volcker rule is exponentially more important than fighting about whether a Fed facility no one needs and no one is using should be maintained.

Those criticizing Secretary Mnuchin for his letter are not serious people. The areas in need of continued financial support have seen said support extended. Borrowing spreads have materially tightened. Any facility that has passed its expiration date now but is deemed needed later on can always be re-visited if circumstances warrant. There are funds authorized by Congress for deployment to COVID relief, and Treasury can use these funds now to do just that, generating a far more impactful response than they would sitting on the shelves at the Fed. What is needed is a limiting principle in what the Fed’s degree of control over the U.S. economy really is.

But as many of us have been saying for decades, the role of the Fed in the economy is itself a mere symptom of the bigger problem: the lack of a limiting principle in the role of the government itself in economic life. Solve one, and you inevitably solve the other.