Pat Toomey apparently felt the need to explain himself on Monday.
With a $900 billion stimulus deal now done, and $600 checks set to go out to Americans as early as next week, I suppose it’s safe for everyone to smile and chuckle (albeit nervously) about what nearly happened as a result of Toomey’s eleventh hour gamble.
For those not apprised, late last week, Pat tried to insert language into the stimulus legislation making virus relief contingent on new stipulations around the Fed’s emergency lending powers.
At best, Toomey’s last minute “contribution” to the bill seemed ill-timed. At worst, it looked like an attempt to undermine the Fed and Janet Yellen ahead of the transition. Fortunately, a compromise was reached late Saturday.
In remarks to CNBC Monday, Toomey again insisted his intentions were good, although he made it absolutely clear that Republicans’ reservations centered primarily, if not exclusively, on lending to state and local governments.
“Democrats started to increasingly call on the extension of these programs… the House passed a bill commanding the Fed to use the municipal facility to do 10-year, 25 basis point loans to any municipality without even having to attest that they couldn’t get credit elsewhere,” he said.
In case it still wasn’t clear, Toomey made it explicit. “So, my concern was, there would be tremendous political pressure to misuse these — to morph these liquidity facilities into an instrument of fiscal policy,” he remarked. He called that “a terrible idea.”
There are several things worth pointing out.
First, Toomey is a long-time critic of Fed largesse and served as president of the Stephen Moore-founded Club for Growth from 2005 until 2009. Toomey expressed support for Moore’s Fed nomination last year, despite that nomination being one of the most laughable, far-fetched ideas floated over the entirety of Donald Trump’s presidency (no small feat to be sure). That alone disqualifies Toomey as someone who can be taken any semblance of serious. The idea of Moore on the Fed was lunacy. Pure, unadulterated lunacy. Even Moore himself seemed to realize that at times.
Second, there is no debate about what Republicans were trying to accomplish with Toomey’s provision. They wanted to guard against the prospect that Yellen and Jerome Powell would institute fiscal-monetary partnerships to the benefit of state and local governments. This wasn’t about corporate bonds or “moral hazard” as it relates to businesses. This was about the GOP trying to preempt localized financial assistance, which is entirely consistent with Mitch McConnell’s ongoing resistance to funding for local governments, and matches up perfectly with Trump’s tweets and public remarks about “bailing out badly-run Democratic” locales.
You may think that’s a justifiable concern. But let’s not forget that state and local governments are massive employers. They employ our families, friends, and neighbors, just like small businesses and just like, by the way, the massive companies whose bonds the Fed purchased as part of the primary market corporate credit facility.
Third, the Fed is already an “instrument of fiscal policy.” The figure (below) captures the dynamic during the worst months of the crisis.
Treasury issues debt and the Fed buys it. That’s monetization. And now that the Fed has tied ongoing monthly asset purchases ($80 billion in Treasurys and $40 billion in MBS) to “substantial” progress towards the achievement of economic outcomes, that monetization is poised to continue indefinitely.
Again: Monetary policy in modern, advanced economies is already “an instrument of fiscal policy.” It’s been that way for nearly a decade. Toomey knows that. He’s spoken publicly about QE on any number of occasions in the past, and he’s sparred with Ben Bernanke and Janet Yellen over Fed accommodation. “What happens when this morphine drip starts to end?,” he asked Yellen, during her confirmation hearing in November of 2013.
Let’s take a quick step back to recap. Having a middleman in the Fed bond-buying equation doesn’t mean it’s not debt monetization. Arguably, all the middlemen do is hamper the monetary policy transmission channel, or at least as it relates to the real economy. That’s readily observable in a simple comparison of the Fed’s balance sheet to velocity (below).
That’s one reason why Fed largesse has a bigger impact of financial assets than it does on the real economy.
Toomey seems to have a somewhat nuanced view of this, but being from the Stephen Moore school of sock-puppetry, he can’t quite connect all the dots, and he surely isn’t on board with a modern approach to government finance.
“We continue to have this artificially suppressed cost of funding these excessively large deficits that we run,” he told Yellen, in the same 2013 confirmation hearing. “It contributes to, I would argue, fiscal imbalances.” He proceeded to regale Yellen with a spiel that could have walked right out of a Wall Street Journal editorial, before warning on a hodgepodge of potential disasters, including tantrums in rates markets, under-funded pensions, asset bubbles, and, naturally, the penalization of savers.
“Senator, you made a number of different points and I think the first point you mentioned is that low rates, in a way, give rise to fiscal irresponsibility, that it takes the pressure off Congress,” Yellen began. “You know, we have established low rates in order to get the economy moving, which is Congress’s mandate to us,” she continued, adding that “I think it is important for Congress to recognize that as the economy recovers, both short- and long-term rates [can] move up [but] I would argue that we cannot have normal rates unless the economy is normal.”
Fast forward more than a half-dozen years, and the economy still isn’t really normal. An experiment with higher rates ultimately ended in tears during the fourth quarter of 2018. Some would call that, and other events that transpired over the last five years, evidence that folks like Toomey were at least partially correct in their various criticism. But a big part of the problem is that Congress refuses to abandon the pretense of fiscal rectitude or otherwise acknowledge that deficits are simply arbitrary numbers for currency-issuing, developed market sovereigns. Of course, the pandemic forced that acknowledgment, if only in the form of a massive stimulus package that would have seemed unthinkably large outside of the COVID-19 context. As the first figure (above) shows, that was simply accommodated by the Fed.
As Toomey clearly understands, this horse left the barn about a decade ago. The pandemic just made the situation more accessible in terms of the public’s ability to discern the link and connect the dots.
Henceforth, monetary policy will work together with fiscal policy in advanced, currency-issuing economies with sufficient monetary sovereignty to bring about more equitable outcomes for society. That’s just the way it’s going to work. It’s now essentially written into the Fed’s mandate (the tweaks unveiled in August reference social outcomes) and Yellen made it abundantly clear in her first official remarks as Treasury Secretary in-waiting. And, yes, this will entail more explicit forms of “money printing” and more explicit manifestations of central banks working to engineer social outcomes.
You don’t have to like it, but the fact is, the current system (defined by arm’s length monetization wherein primary dealers run interference while lawmakers abrogate their fiscal responsibilities and persist in outdated thinking around deficits and debt) isn’t working. It’s exacerbating inequality and it’s long past time that elected officials cease and desist from the kind of rolling austerity pushes that leave monetary policy on its own without sufficient tools to do the job.
To his credit, Toomey defended Powell from Trump’s incessant attacks on several occasions. Firing Powell “would be a very, very bad idea,” he told Bloomberg in July of 2019, for example. But it’s worth noting that Trump’s accidental advocacy of Modern Monetary Theory wasn’t the issue. That is: The issue with Trump’s criticism of Powell wasn’t so much that central banks must everywhere and always be totally independent. The issue, rather, was that central banks cannot be beholden to executives whose grip on reality is tenuous. Executives like Trump.
The overarching problem is that Toomey, despite being perhaps more competent than your average lawmaker, seems committed to the kind of misguided, outdated thinking on government finances that inadvertently makes it necessary for monetary policy to remain accommodative in perpetuity. In January of 2019, for instance, he cautioned Powell against average inflation targeting, which the Fed of course embraced in August. In the same August “tweak,” the FOMC adopted an approach to employment that echoed a 2019 exchange between Powell and Alexandria Ocasio-Cortez. Folks like Toomey are behind the times. And they’ll eventually lose this battle, although Pat won’t have to concern himself about such matters considering he doesn’t plan to run for reelection.
In his Monday remarks to CNBC, Toomey attempted to make last week’s kerfuffle sound like a much narrower debate than what it actually represents. “These are unprecedented, extraordinary [Fed] powers, and they’re only justifiable in a real emergency,” he said. “The Fed recognized that. They came to Congress back in March and said, ‘This is what we’d like to do. Will you fund it?’ And then they set them up, and I voted for that.”
This is about much more than that, and Toomey surely knows it. If he doesn’t, he’s not as intelligent as I’m giving him credit for.
“If we get back to a terrible circumstance next year and the Fed and the Treasury come together and say, ‘Hey, this is the kind of facility we need,’ I would support that under the right circumstances,” Toomey went on to say. “But it shouldn’t be a sort of permanent vehicle that’s there for some politicians to decide, ‘Let’s take this over and start doing subsidized loans.’”
Actually, yes, it should. If politicians can’t make those decisions, and the Treasury can’t make those decisions, and the Fed can’t make those decisions (and note that Toomey has ruled out all three), then who’s supposed to make them? Once again, it’s clear what the goal was late last week: Senate Republicans didn’t want to chance a scenario where Biden, Yellen, and Powell, backed by a Democratic House and, perhaps, a narrow majority in the Senate, were able to utilize Fed facilities to pursue their policy aims. No such objections would have been raised by Toomey had Trump won and had the Senate already been decided.
In the end, though, it’s hard to escape the feeling that Toomey simply can’t be taken seriously about anything anyway. In 2017, around a month before Republicans crammed through a tax cut for the wealthy and corporations, Toomey said this: “I think this tax bill is going to reduce the size of our deficits going forward.”
Two years later, the deficit swelled to the widest in seven years.