“Losses look really, really bad,” Kathryn Judge, a professor at Columbia Law School, said in an email. “Most people are comfortable with the Fed providing liquidity, even a lot of it, to keep markets functioning.”
If the Fed does take on a risk but Treasury backs at least the first round of losses, it means the elected government is agreeing to the plan. That puts a veneer of accountability on the whole enterprise, giving unelected central bankers some cover.
Is it a bailout?
While the $46 billion in Treasury-determined funding will go to specific industries, the Fed-tied money is likely to be used more broadly.
So far, the Fed’s emergency programs benefit wide groups: The Fed is buying high-grade corporate bonds, for instance, because such debt had become hard to issue or renew, threatening to choke off funding to a broad range of companies.
The goal is to keep critical markets functioning through the coronavirus crisis.
“The government has stepped into the breach in a dramatic way, and has made Treasury the Federal Reserve’s deputy,” said Peter Conti-Brown, a Fed historian at the Wharton School of the University of Pennsylvania. “The Federal Reserve has become your friendly neighborhood loan officer.”
Tell me the nerdy details.
Since you asked. When we say that the Fed “essentially” buys debt and makes loans with its emergency lending programs, it’s because the way many of the operations are structured is a bit complicated.
Legally, the Fed is not allowed to buy debt that is not backed by the government, but in emergencies it can do so as long as it secures its purchases. To achieve a degree of separation, it sets up a special purpose vehicle and then lends into it — with a layer of money from Treasury providing the needed security. The vehicle then snaps up bonds or makes loans to the private sector.