With her unerring instinct for the jugular on which media thrive, Sen. Warren on Tuesday called Jay Powell a “dangerous man.”  This promptly sent many into still more feverish speculation about the Fed’s next chairman, blotting out coverage of an even more consequential development in the House:  Democratic plans to rewrite the Fed’s powers in the next financial crisis.  Last week, I pointed to the political price for Mr. Powell’s renomination:  the Omarova appointment.  A structural one with even more lasting impact is the rewrite of the Fed’s emergency-liquidity powers to, as Democrats demand, end backstops for “Wall Street” in favor of Fed facilities for everyone else.

Although little noticed, HFSC Chairwoman Waters on Thursday said for the second time in as many weeks that “Our committee is committed to ideas to ensure that facilities like these [the Fed’s in 2020] can more directly support workers and small businesses as well as state and local governments the next time there is a crisis.”  Holding fire on Mr. Powell, Senate Banking Chairman Brown also targeted Fed support for Wall Street in his opening statement on Tuesday.  This follows an inconclusive HFSC hearing a week or so ago on just what these new facilities might look like but make it clear that an array of reforms is under active consideration.

Importantly, these demands for people-focused facilities aren’t an isolated case of progressive pique.  After the 2008 crisis, there was much bipartisan ire over whom the Fed helped how.  This led to a significant rewrite of Section 13(3) of the Federal Reserve Act followed by obstinate Fed refusal to trim its emergency sails any more than expressly and absolutely necessary under Dodd-Frank.  The Fed caved with a more cautious set of final systemic liquidity standards when Chair Yellen’s confirmation hung on them.  Still, trillions flowed directly to Wall Street in the 2019 repo crisis and again in 2020’s pandemic panic.

The central bank can and should step in when financial stability is truly in jeopardy, but its instincts are to do so for every potentially systemic financial-market corner even if downturns might prove only salutary corrections essential to ensuring market discipline.  At the least, safety nets should be targeted, carefully trimmed, and quickly furled.

Because the Fed’s safety nets instead proved iron bulwarks, they haven’t gone unnoticed.  In 2015, Sen. Warren was joined by one of the Senate’s most conservative Republicans in legislation imposing an array of recipient, fee, and liquidity criteria on any future FRB emergency backstops.  Six years later and sill more hundreds of billions done gone, the focus is not on penalizing and restricting emergency Wall Street support, but redirecting it to those left behind as financial markets renew their ever-upward march.

I advocated something along these lines in 2020 when I outlined a “Family Financial Facility,” and Congress actually mandated support for small-and-mid-sized businesses and municipalities (much to the Fed’s internal discontent).  These facilities were cobbled together in a crisis and none worked as hoped.  When President Trump’s Treasury Department yanked its backstops for these programs at the end of last year, the Fed protested even though it was more than unclear then as now what it would have done with these blank checks.

At the time, Democrats wanted the Fed to keep backstopping mid-sized businesses and municipalities – precisely the intervention the Fed disliked the most.  Knowing this, Democrats now want a lot more from the Fed without quite knowing for whom the aid should flow and how to make it happen.

One idea on the table – a National Infrastructure Authority – comes from Comptroller-nominee Omarova.  It essentially sets up a new Fed-like central bank focused solely on “economic justice” with even less political accountability than the Fed.  Even the most progressive Democrats at the HFSC hearing seemed ambivalent about this sweeping vision.  Whatever its merit (and I don’t see much), it’s not realistic political prospect.

What is?  Another option is to trust Congress to intervene effectively as it did with the 2020 CARES Act.  However, this excursion into landmark bipartisan, equitable fiscal policy was unmatched in 2008 and is at best uncertain going forward given hyper-fractious fiscal policy.

What’s both needed and doable now is a new approach to financial-system and macroeconomic resilience wrought through automatic fiscal and financial-stability stabilizers.  Importantly, the Fed has considerable discretion under current law to establish these now, which it should do transparently not only to reflect a new mission of equitable intervention, but also to define the conditions for market intervention to warn participants not to count on the bailout next time.  New law would be better, but at least as far as the Fed is concerned, new law isn’t necessary.

Once established, automatic cushions are pre-positioned facilities that aren’t made up on the fly under ever-changing macroeconomic, market, and political conditions.  Think of them as counter-cyclical policy buffers that will work a good deal better than the ever-controversial, thoroughly uncertain counter-cyclical capital buffers on which the Fed sort of relies.  The auto-stabilizer kicks in when the Board of Governors determines an imminent, grave threat exists to financial-market stability or – and this is important – to the liquidity of low-, moderate-, and middle-income households or businesses without ready access to the capital markets backed by the Fed’s financial-market support.

The Payment Protection Program is an example of the kind of facility the Fed could establish under this authority without express Congressional approval.  The same is true for my Family Financial Facility and other structures that use existing financial-market intermediation channels to provide urgent, ground-up liquidity support.  The payment system of course needs a major makeover to make these facilities function as needed and a lot of pre-crisis infrastructure build-out is also necessary.  However, it’s not just feasible for the Fed to support ground-up economic recovery, it’s essential.

Why essential?  Look at what happened in 2020 to see why.  The Fed certainly averted financial cataclysm, but its actions also exacerbated acute economic inequality.  This is more than an economic injustice; it’s an economic-growth retardant.

We know that acute economic inequality slows growth and stokes financial crises.  The Fed’s actions so far have averted short-term harm at the cost of long-term risk.  Going forward, there’s a better balance and a more equitable way.