April’s Federal Open Market Committee (FOMC) meeting did not offer many surprises and the targeted federal funds rate remained unchanged at 0 to 0.25 percent. Until recently it was the Committee’s interest rate decision which held the interest of the populace, but given the newly created billion-dollar lending programs, main street has been given a new reason to pay attention. Unsurprisingly, the Fed’s press releases can be somewhat lackluster, especially when no significant policy changes have been made. The statements appear almost templated and offer little variation between the previous meeting’s releases. However, it’s the opening statement and the Q&A that follows, which make for the most informative parts. It is in these moments that we can bear witness to the leadership and economic understanding of one of the most powerful men in the world.
The highlight of this session came near the end of his opening remarks regarding the Fed’s powers, when Chairman Powell pointed out that:
these are lending powers, and not spending powers. The Fed cannot grant money to particular beneficiaries. We can only make loans to solvent entities with the expectation that the loans will be repaid.
This statement is true. The Fed cannot actually “spend” the $6.573 trillion of total assets on its balance sheet; rather this amount is the result of the Fed purchasing or lending the equivalent dollar amount to entities that can buy assets such as stocks, bonds and real estate. The Fed can neither spend the $600 billion related to the Main Street Lending Program (MSLP) that has yet to be distributed or the $670 billion for the Paycheck Protection Program (PPP), which only recently opened.
His conviction of the Fed as a lender and not as a spender continued into the Q&A, when he told reporters:
We do not make grants. We cannot make grants.
Of course, when explaining how the MSLP differed from the PPP he mentioned how:
This is different from the PPP, that paycheck protection program in two ways. One is these are not grants, these are loans.
Ultimately, he is not in fact lying, since the Fed is not directly lending this money to bankrupt entities; however, the fact that someone is technically right does not mean that they are morally, ethically, or “economically” correct. Although they are not lending directly to individuals, it is dishonest to pretend that the Fed’s lending facility does not enable these programs to occur. It would be interesting to imagine what would happen if the Fed did not create these the lending facilities or buy US debt. After all, without the Fed’s aggressive QE (quantitative easing) programs and asset purchases, the federal government would not be able to make the grants it does.
Considering that the US government received $3.462 trillion in tax revenue in 2019, if the above two programs had had to come directly from the taxpayer, the tax burden would have increased by another $1.2 trillion. This would have been nearly impossible to do, as it would have required Congress to convince the working class to effectively bail out the lucky individuals who submitted their loan/grant applications first. But since the Fed exists, Congress doesn’t have to go to the taxpayers for revenue. Congress can just go to the Fed.
Perhaps it is for this very reason that the Fed was created, this seeming “monetary magic,” whereby money out of thin air can be given to the few at the expense of the many.
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