Another day, another $2.3 trillion from the Federal Reserve.  I’ve been asked ever since the Fed first opened its enormous windows on March 23 if this all brings the Fed too far into fiscal policy and, if so, then what.  The answers to these questions are first yes – the Fed is now a fiscal agent – and then that a lot could go wrong.  When it does, Congress and President Trump will of course blame the Fed, not themselves.

In the CARES Act, Congress reserved for Treasury the direct lending to manufacturers from which the Fed is barred under even the most creative readings of the Federal Reserve Act.  This amounted to $46 billion.  The remaining $454 billion authorized for Treasury is to backstop Fed operations that its Chairman and the Treasury Secretary proudly announced would lead to at least $4 trillion in new credit.  “Main Street” and municipal finance are singled out as must-dos, but the Fed was also cut loose to print trillions to salvage any other financial sector it and Treasury favor.

If the Fed hadn’t volunteered to intervene with Treasury’s blessing (not to mention billions), then Congress and the White House would have had to take the fall for the CARES’ four trillion.  There are two ways the U.S. – like the rest of us – gets to spend money:  on and off the balance sheet.  Congress can tax and spend – actions that show up in the deficit – or, as it’s now doing with abandon, it can ask the Fed to finance the U.S. economy and hope it somehow all comes right because none of the Fed’s facilities will lose much money.  One certainly hopes so, but the Fed is allowing itself to leverage up its balance sheet at ratios that would send a U.S. GSIB to the capital pokey.

In 2008, Treasury and the Fed defended all their facilities on grounds that each eventually made money for the taxpayer.  At the time, I just as consistently said that this was nice to know, but no defense for using the central bank as the Treasury’s flunky.  As of yesterday, the Fed has opened the spigots to many borrowers, including the nation’s largest private-equity firms.  Why not just do them one better?  If all of the loans being backstopped are so good for America, maybe the Fed should just make them.

The Fed is putting its independence on the line to safeguard financial-market stability, but it wouldn’t be a de facto fiscal agent had it better understood that leveraged finance largely outside the reach of regulated banks when the majority of American’s can’t service their debt is a dangerous platform from which to defend central-bank independence.  The Fed couldn’t have seen COVID coming, but it could and should have seen the macroeconomic vulnerabilities that led to the disappearance in just the last three weeks of almost all of the job growth since the great financial crisis.

But, in for a penny, in for the $6.1 trillion now on the Fed’s balance sheet ahead of at least another $4 trillion.  The really brilliant thing about using the Fed as the off-balance sheet cleaner-upper is that Congress and the Administration now get to stand back, taking credit if the economy recovers and knowing where 20th and Constitution Avenue is if it doesn’t.

Because of the Faustian bargain the Fed struck with Treasury, the deficit hasn’t gotten anywhere near as huge as it would be if fiscal policy really came to grips with the COVID crisis’ destructive force.  In 1933, no one thought of fancy windows, so the Administration and Congress built an array of New Deal programs funneling money directly into the hands of those at the greatest risk.  This was a bottom-up policy aimed at strengthening the most vulnerable so that all could do better over time.  In 2020, Congress and the Administration are more than content to let the Fed make the hard decisions about who gets the money.  If the public is angered by all the private-equity companies, asset managers, and giant corporations getting the lion’s share of it – and angry they may be – I rather doubt President Trump will be shy about pointing that out ahead of the November election.