How Powell and Mnuchin Became the Duo in Charge of Saving the Economy

WASHINGTON — On March 15, as economic devastation from the coronavirus showed no signs of abating, Jerome H. Powell, the Federal Reserve chair, aimed the full weight of the central bank against the problem.

He and his colleagues cut rates to near-zero in an emergency Sunday night move, while also rolling out a huge program to snap up government-backed debt and sweetening agreements meant to keep dollars available overseas.

It wasn’t enough.

Markets plummeted the next morning, with panicked investors fearing that the Fed’s actions, which used almost every tool the central bank had at its unilateral disposal, would fail to stabilize the economy.

They clamored for Mr. Powell to turn on the central bank’s emergency lending authorities, through which it could soothe dysfunctional markets. But those programs, which were used in the 2008 financial crisis, had since become more difficult to activate. The 2010 Dodd-Frank law now required the Treasury secretary, Steven Mnuchin, to sign off on any Fed lending facility.

Mr. Powell’s relationship with Mr. Mnuchin — a comfortable friendship forged over weekly breakfasts and similar backgrounds in finance — suddenly morphed into a vital partnership.

Mr. Mnuchin, who had been in near-constant contact with Mr. Powell as markets bled, agreed that the Fed ought to use its emergency lending authorities. By the time the authorization forms arrived at Treasury in search of Mr. Mnuchin’s signature, it was a formality.

On March 17, the Fed and Treasury announced that Mr. Mnuchin’s department would back the first $10 billion in losses on a new emergency lending program, an intervention meant to keep short-term loans available to companies newly desperate for financing.

The coronavirus poses the most significant economic threat since at least 2008, thrusting Mr. Mnuchin and Mr. Powell into key roles in determining whether the United States economy suffers a short, manageable slowdown or enters a deep and painful recession.

The $2 trillion stimulus package that President Trump signed on Friday hands a huge pot of taxpayer money — $500 billion — to Mr. Mnuchin. The bulk of that will back the Fed’s emergency lending programs, which are aimed at ensuring that credit continues flowing, enabling businesses to stay afloat, workers to keep their jobs, and the economy to snap back once the virus subsides, quarantines are lifted and American life restarts.

Economists are now predicting a severe slowdown, with growth contracting sharply and a spike in unemployment that could reach 15 percent by midyear. Mr. Mnuchin and Mr. Powell’s efforts are critical not only to workers and businesses but to Mr. Trump, who has staked much of his reputation on a climbing stock market and robust economy, both of which are now threatened as he faces re-election.

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“I wish we could have our old life back. We had the greatest economy that we’ve ever had,” Mr. Trump said at a White House briefing on Sunday. “We are bringing our economy back strong like it was before. It is even better than before. A lot of the money you read about, that’s all coming back.”

Mr. Mnuchin and Mr. Powell have been rapidly deploying resources to try and ensure that rebound happens. Mr. Mnuchin worked on details of the new legislation with Congress, pushing for money that could be used to aid companies big and small. Mr. Powell and other Fed officials, including Randal K. Quarles, the vice chair for supervision and regulation, talked with lawmakers about Treasury funding to backstop the Fed’s programs.

Mr. Mnuchin now has enormous influence in doling out funds to hard-hit industries and small businesses, and the Fed’s emergency lending programs will be pumped up with a $454 billion taxpayer investment — enough to insure against losses on what could amount to more than $4 trillion in lending.

“It is shaping up as a power move with quite a bit of discretionary and open-ended decision making authority being consolidated within the Federal Reserve and the Secretary of the Treasury,” said Sarah Bloom Raskin, a former governor of the Federal Reserve Board who was deputy treasury secretary in the Obama administration.

Besides backstopping the Federal Reserve’s lending facilities, the Treasury Department is helping to manage a $350 billion fund that will provide grants and loans primarily to small businesses.

Mr. Mnuchin will have leeway over another $46 billion in industry-specific funds that Congress has appropriated to help the airline industry and companies involved in national security. He will be able to decide which businesses are worthy of loans and loan guarantees; when interest should be waived; when restrictions on corporate stock buybacks should be lifted; and whether or not to take an equity stake in a company in exchange for bailing it out.

In some ways, Mr. Mnuchin and Mr. Powell are odd candidates to shoulder such vast responsibility. They are both financial deal makers by trade, not experts in economic crises. Nor do they have Washington’s unbending confidence: Mr. Powell has been the subject of two years of steady criticism from Mr. Trump, who has likened his Fed Chair to an “enemy” and a bad golfer, while Mr. Mnuchin has drawn the skepticism of Congress for refusing to release the president’s tax returns.

At times Mr. Mnuchin, who advised Mr. Trump to tap Mr. Powell, has tried to thaw the relationship between the Fed chair and the president. In February 2019, Mr. Mnuchin facilitated a casual dinner with Mr. Trump, Mr. Powell and himself at the White House residence, where they discussed the economy, golf and the Super Bowl.

The power that Mr. Powell and Mr. Mnuchin have amassed is prompting concerns among some members of Congress and financial reform groups. Some Democrats have worried that the Fed will be able to dole out loans with few limitations. And while the $46 billion that Mr. Mnuchin oversees directly will be subject to examination by an inspector general, Mr. Trump has already suggested he could impede the integrity of that position by determining what information is shared with Congress.

On Monday, Mr. Mnuchin said in an interview on the Fox Business Network that Treasury will soon roll out new rules that will allow small business owners to start applying for and receiving loans on Friday.

Mr. Mnuchin, whose Treasury Department was already short-staffed, is recruiting additional people from across the government to help manage the new programs and is placing greater responsibility on his deputy, Justin Muzinich, to oversee the bailout money.

The Fed, which has been monitoring the economic fallout of the virus since January, has tried to keep money flowing to both households and businesses by rolling out additional emergency lending programs. Some smooth over the municipal bond market by accepting local debt — which is issued to build roads and finance schools — as collateral. One will buy newly-issued corporate bonds from highly-rated companies or make loans to those firms — something the Fed has never tried before.

“The Fed is performing a critical function,” Ben Bernanke, the former Fed chair, said. It “has done a really good job of rolling this out quickly.”

The new legislation will allow the central bank to grow the size and scope of its programs and potentially push its boundaries even further. It funnels hundreds of billions into Treasury’s Exchange Stabilization Fund that can be deployed to cover potential losses on the Fed’s loans to businesses, states and municipalities. Legislators have particularly urged the Fed to do more for local governments, something it has shied away from in the past but is now contemplating.

“I know of no other time that a legislature has delegated to a central bank such far-reaching authority to allocate credit,” Kathryn Judge, a professor at Columbia Law School and an expert on financial regulation, said of the program.

Treasury signs off on emergency lending programs and has input on their goals, but the Fed has historically worked out the gritty details and handled implementation, sometimes with the help of outside firms. For instance, a subsidiary of BlackRock, the world’s largest asset manager, is setting up the Fed’s corporate bond buying.

The programs are governed by some rules — they must benefit broad groups, and the Fed will answer to lawmakers for its actions. Businesses that get direct loans backed by the new funding cannot make new plans to buy back stock for a year after the loan is outstanding, though Mr. Mnuchin can waive that provision.

Mr. Mnuchin’s moves will also be watched: The inspector general installed at the Treasury Department will be tasked with monitoring how its loans are used, and a bipartisan congressional oversight panel will be set up to foster accountability.

But some Democrats and financial watchdogs have expressed discomfort at concentrating so much power in the hands of so few people, warning that the lending programs might put the needs of big corporations over workers.

“They can actually lay off workers while receiving public assistance,” Marcus Stanley, the policy director of Americans for Financial Reform, said on Twitter, referring to the Fed’s programs. “Not only that, but the door is open for big corporations to benefit from government cash while turning right around and paying that cash out to wealthy shareholders and executives, at the same time as they lay off workers.”

They’ve also questioned the integrity of the oversight process. Mr. Trump will appoint the new inspector general, and on Friday, he released a signing statement suggesting he had the power to decide what information the official could share with Congress.

On Sunday, Mr. Mnuchin pledged full transparency about the money but demurred about the role of the inspector general.

“There’s constitutional issues,” he said on “Fox News Sunday.” “I’m going to leave that to the lawyers and to Congress to figure out.”

Neil M. Barofsky, who was the first special inspector general of the Troubled Asset Relief Program, the $700 billion bailout for banks, said that Mr. Trump’s suggestion that the new official could be gagged might have a chilling effect.

“It’s concerning,” Mr. Barofsky said, noting that he successfully employed the threat of notifying Congress in that role. “It might embolden other agencies to simply refuse requests for information.”

Mr. Mnuchin has been given up to $100 million to hire private sector firms and individuals to assist in development and execution of the programs. Some Democrats have derided that money as a “slush fund” and warned Mr. Mnuchin against using it to benefit his finance friends.

Mr. Mnuchin has already spoken to executives at his former firm, Goldman Sachs, about potentially getting involved, according to a person familiar with the matter. He has also been consulting regularly with Henry M. Paulson Jr., the former treasury secretary and Stephen A. Schwarzman, the chief executive of The Blackstone Group, a private equity firm, about the financial crisis-era powers that he will need to employ and the goal of reopening parts of the economy.

At a news conference on Friday evening, Mr. Trump said that prominent Wall Street executives would be deeply involved in negotiating the terms of bailouts for companies like airlines. He specifically mentioned Laurence D. Fink, the chief executive of BlackRock, and said that Mr. Mnuchin was recruiting other “brilliant people” from Wall Street.

The president said that he expected the Wall Street executives would take little pay for their work.

“Peanuts, they want compared to what they normally get,” he said.

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