Following uproar about bailout decisions during the 2008 financial crisis, the Dodd–Frank Wall Street Reform and Consumer Protection Act took away powers from the Federal Reserve that allowed it to pick and choose who gets bailed out. Now some are arguing those powers should be restored.
Treasury Secretary Steven Mnuchin believes the economic fallout from the coronavirus and efforts to contain it may require more financial tools than regulators currently have. He told ABC’s “This Week” that “certain tools were taken away that I’m going to go back to Congress and ask for.”
After the Great Recession, there was a backlash. People were upset that the Fed came to the rescue of some firms outside the banking system, but not others. So Dodd-Frank took away some of that power and created a new rule that said the Fed can’t pick and choose who gets help.
“Roughly speaking, they have to give it to everybody or nobody,” said John Cochrane, a senior fellow at Stanford’s Hoover Institution. He said the idea was to prevent the Fed from getting sucked into the business of picking winners and losers. He gives this example.
“Suppose that airlines will get in trouble. There will be an airline bailout package, a populist backlash to that,” Cochrane said. “The Federal Reserve should not be the one making that call if it’s going to stay a politically independent, technocratic agency.”
Better, he said, for politicians to make those kinds of decisions. Donald Lamson disagrees. He’s a lawyer and an independent consultant who worked on parts of Dodd-Frank. Lamson said Congress went too far in hamstringing the Fed.
“This was one of the major mistakes Congress made,” Lamson said.
He said he’d rather have experts at the Fed decide whether a company needs help, and said they can do so quickly.
Darrell Duffie agrees. He’s professor of finance at Stanford’s Graduate School of Business. He gives this example:
“Suppose some individual nonbank were to get into serious trouble financially,” Duffie said. “Were it to fail, it would create a real crater on the economy.”
Under current rules, the Fed would not be able to step in — can’t help one company; you have to help them all.
“The Fed would just have to sit on its hands until this developed into a more significant crisis and multiple firms were in trouble,” Duffie said.
The new coronavirus and efforts to contain it threaten to take down industries and firms, and some will need emergency loans. The issue of whether to return power to the Fed is ultimately about who’s going to pick who gets that help, who’s going to hand it out, and how quickly can they do it.
COVID-19 Economy FAQs
Can businesses deny you entry if you don’t have a vaccine passport?
As more Americans get vaccinated against COVID-19 and the economy begins reopening, some businesses are requiring proof of vaccination to enter their premises. The concept of a vaccine passport has raised ethical questions about data privacy and potential discrimination against the unvaccinated. However, legal experts say businesses have the right to deny entrance to those who can’t show proof.
Give me a snapshot of the labor market in the U.S.
U.S. job openings in February increased more than expected, according to the Labor Department. Also, the economy added over 900,000 jobs in March. For all of the good jobs news recently, there are still nearly 10 million people who are out of work, and more than 4 million of them have been unemployed for six months or longer. “So we still have a very long way to go until we get a full recovery,” said Elise Gould with the Economic Policy Institute. She said the industries that have the furthest to go are the ones you’d expect: “leisure and hospitality, accommodations, food services, restaurants” and the public sector, especially in education.
What do I need to know about tax season this year?
Glad you asked! We have a whole separate FAQ section on that. Some quick hits: The deadline has been extended from April 15 to May 17 for individuals. Also, millions of people received unemployment benefits in 2020 — up to $10,200 of which will now be tax-free for those with an adjusted gross income of less than $150,000. And, for those who filed before the American Rescue Plan passed, simply put, you do not need to file an amended return at the moment. Find answers to the rest of your questions here.
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