Kathryn Judge, Columbia Law School Professor joins Yahoo Finance Live to weigh in on the latest stimulus talks as the U.S. House and Senate prepare to vote on the $900 billion COVID-19 relief bill and break down what would happen if the Fed’s lending facilities are not passed in the new stimulus deal.
- The Federal Reserve caught a lot of attention over the weekend as it appeared that a debate over its emergency lending programs held up the entire $900 billion stimulus package. And joining us now to walk through exactly what happened and why it's important is Kate Judge. She's a law professor at Columbia who's an expert on the legal matters surrounding the central bank. How are you?
KATHRYN JUDGE: Doing well. Thank you.
- So I want to kick things off by just talking about the compromise that was made. It effectively bars the Fed, again, the central bank from reopening three specific emergency programs that they had opened up in the midst of the crisis-- one to help state and local governments, one for small and medium-sized businesses, in addition to one that backstops the corporate bond market-- a lot of inside the weed stuff here. But what's the consequences of the Fed not being able to have those tools in the future, if this package doesn't pass today.
KATHRYN JUDGE: It's a great question. And it depends how far in the future you look. One of the near-term consequences is it means that when we have the change in transition and the new administration comes in, they are not going to be able to use those facilities that have been set up, and are currently operational, to potentially provide even more of a boost to the economic recovery that's still fragile and underway. And, particularly when it comes to Main Street and municipalities, there's a lot of reason to expect that the change of administration might have resulted in, perhaps, more generous terms and more support.
Longer term, when the next economic shock hits, or the next financial crisis hits, it's going to mean that the Fed is still able to provide support to banks and even to non-bank financial intermediaries. But it's not going to replicate what it did this time around, where it provided support directly to the real economy.
- Yeah. A lot of those things are, obviously, in view as the Biden administration takes office next year. Possible that Janet Yellen could be heading the Treasury, which would work with the Fed on these facilities, if the economy does end up going south again.
But I guess I'm wondering, broadly speaking, what does the debate in Washington over this mean over Fed independence? We know that, on one hand, a lot of people are saying the Fed should have been more aggressive with its facilities to help the economy. Whereas, on the other side of things, people were saying, it's not really the central bank's place to be doing this type of stuff, and that it really should be Congress doing it.
KATHRYN JUDGE: You know what? Unfortunately, I don't think it actually resolves any of the issues that are lurking around the Fed's independence. I think there were a lot of really important questions last spring about whether the money should just go to Treasury, and really then should take the form of support that companies and other entities most needed. But at that time, Congress made the decision, [AUDIO OUT] asked the Fed and the Treasury to work together to create these lending facilities.
And it took a lot of work on the Fed's part to get these up and running. They've struggled along the way. But these are now operational. And so what's interesting is when we have a change of administration, bringing about a change in the tools that are available to the Fed, in some ways that's contrary to the Fed's independence. Really respecting the Fed's independence might mean trusting current leadership, but also trusting the many mechanisms in place to protect the Fed's independence, to believe that there'll be continuity over the change.
So while there's a lot of talk about Fed independence here, I think that that would have been much more well suited for March than trying to take away tools that have been actively used now for six to nine months.
SEANA SMITH: Hey, Kathryn. It's Seana here. Just a quick question. Going back to the effectiveness of these lending facilities that we saw from the Fed, I guess, from your view, to what extent do you think they changed the dynamics of the market? Because I think that issue has been debated over the last couple of months.
KATHRYN JUDGE: You know what, that's a great question. And I think it's going to take us a little while to fully parc it out. So one of the many reasons that some were concerned about the Fed stepping in is it was clear that they were in a much better position to provide support for the largest companies than to provide support for Main Street.
As soon as they announced the two different corporate credit facilities, we saw a real, meaningful decline in spreads. And the largest companies have been issuing a record amount of debt, basically, ever since that announcement, at very reasonable rates.
By contrast, for the midsize companies that they sought to help through the Main Street facility, they really needed to work with banks. And that was completely new territory. So it took a lot longer to get off the ground and really didn't work that well, initially. But we've slowly seen an increase in uptake.
And so I think part of the reason that people have concerns about making this change now is whether that might be a useful tool in the future, or whether it's something we're just going to have to abandon. We really don't know yet. We don't have enough evidence. And the next six months might have provided the additional information that would have allowed policy makers, next time we face this type of challenge, to really have a better understanding of the capacities and limits of what the Fed can do well.
- OK, Kate, so I don't want to lose any viewers here, but I want to drill down into the legalese of what we might see in this bill. We don't have the text yet, but a lot of commotion over whether or not they're going to bar the Fed from creating similar to, or same programs, as the ones that Senator Pat Toomey had added a restriction to, again, those three that I mentioned at the top of this interview.
Could you see the Fed even wanting to try and attempt to set up let's say, for example, something that might backstop corporate debt markets that maybe isn't the same as the primary and secondary corporate for credit facilities, but some variant of it. Or is that just legally something that the Fed-- legal counsel just would not want to take up? Another way of asking this is is this whole semantic issue going to crop up again six months from now?
KATHRYN JUDGE: You know what? It's a good point. There was a lot of concern early on because the original draft would have gotten leaked. It was similar to. And a lot of lawyers, myself included, were concerned that that was overly broad and that was ambiguous. And so there was a possibility of it precluding potential programs or facilities that could be quite useful.
As you pointed out, the language has gotten narrow. But how effective that narrowing is going to be, in terms of really freeing the Fed up to do what it most wants to do, depends on how aggressive the Fed lawyers want to be. And I think there could be very real concerns that anything that looks too much like these facilities-- like you said, anything that's backing corporate credit, for example, and really buying up bonds-- might be territory that the Fed is going to be very hesitant to enter into without further authorization by Congress.
SEANA SMITH: And Kathryn, real quick as we wrap up here, I'm just curious, what do you think the top priority should be for the new administration just to create that more sustainable path for economic growth that we have been talking about over the last couple of months?
KATHRYN JUDGE: I would say it's dealing with the structural inequities that have both been revealed and accentuated by COVID. As we've been discussing, the largest companies were doing great before COVID hit. And they are actually doing even better today.
By contrast, a lot of the smaller and midsize companies have struggled to do well both on the operations side, but also in terms of their access to financing. And that's a differential that really ought to concern, I think, the next administration. Because we know the small companies are a really meaningful point of innovation for the country, but also greater opportunities for advancement for different populations.
So, I think, trying to figure out the structural inequities both in terms of the corporate layout and in terms of the individual level will likely be a top priority, and should be a top priority, for the new administration.
- All right. Well, Kate Judge, the professor of law at Columbia University. Thanks so much for joining us. We'll have you back on when those issues crop up again in a few months. Thanks so much for joining us on Yahoo Finance.
KATHRYN JUDGE: Thank you.