Fed should be ‘flexible’ in response to coronavirus crisis, says oversight commission member

The Federal Reserve and Treasury Department should be “flexible” as they deploy $500 billion to protect businesses and local governments facing financial peril because of the coronavirus, said a member of the oversight committee charged with monitoring their efforts.

Rep. French Hill (R-Ark.), who was appointed last month to the Congressional Oversight Commission for the $2.2 trillion coronavirus relief bill, said the Fed should not be inhibited by the stigmas of past crises as the central bank tries to soften the economic blow of the pandemic.

“This is a very different situation than we faced before, at least in modern times, in the sense that the government has taken the decision to shut down economic activity in order to fight a public health crisis,” Hill said in an interview.

“This was not something thrust on a weak economy by weakened market players,” Hill continued, saying the Fed’s response “has to reflect today’s crisis, not some crisis in 1934 or 2008.”

Hill and other members of the commission are tasked with overseeing how the Treasury and Fed use the $500 billion allocated to them to help businesses and municipalities stay afloat after the coronavirus pandemic ravaged their finances. 

The $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $464 billion to backstop emergency Fed lending facilities and another $36 billion for Treasury loans to airlines and businesses deemed critical to national defense.

The Fed announced in April it will finance more than $2 trillion in emergency loans using the $464 billion in credit protection allotted by the CARES Act, overruling past taboos against direct lending to non-financial businesses and local governments. While few dispute the necessity of the Fed’s unprecedented intervention, Hill’s comments come amid a debate over the scale and scope of the central bank’s emergency loans.

Some economists have voiced fears that the Fed’s historic unwillingness to take losses on emergency loans could hinder its response, even as Fed Chairman Jerome Powell pledges to do whatever it takes to keep credit flowing and the economy stable. Others have expressed concerns that the Fed’s decisions to purchase higher-risk corporate bonds and offer emergency loans to larger businesses could fuel dangerous bubbles or prop up firms that will eventually fail.

Hill said that while the Fed and Treasury must follow a “strategy for economic preservation,” concerns about moral hazard that shaped the response to the 2007-09 crisis do not apply to the current relief effort.

“You had a conflict in administering the program,” Hill said of the 2008 financial sector bailout. “You were concerned about getting the economy stable, getting the economy going again, but you also are lending money or injecting money in companies that actually contributed to the reasons for why you were there in the first place.”

“Here, we obviously don’t have that challenge,” Hill continued. 

Hill, a third-term GOP lawmaker, was appointed to the oversight commission by House Minority Leader Kevin McCarthy (R-Calif.) in April. The other members of the panel include Sen. Pat Toomey (R-Pa.); Rep. Donna Shalala (D-Fla.); and Bharat Ramamurti, a former aide to Sen. Elizabeth Warren (D-Mass.).

Hill is a former banker and served as deputy assistant Treasury secretary from 1989 to 1991 under former President George H.W. Bush. The congressman briefly overlapped with Powell, then a Treasury undersecretary, whom Hill called “a very solid, very analytical, very thoughtful leader who is “very balanced in his approach to problem solving.”