Why the Fed Needs Public Banks

Posted on December 19, 2020Comments Off on Why the Fed Needs Public Banks

On November 20, US Treasury Secretary Steven Mnuchin informed Federal Reserve Chairman Jerome Powell that he would not extend five of the Special Purpose Vehicles (SPVs) set up last spring to bail out bondholders, and that he wanted the $455 billion in taxpayer money back that the Treasury had sent to the Fed to capitalize these SPVs. The next day, Powell replied that he thought it was too soon – the SPVs still served a purpose – but he agreed to return the funds. Both had good grounds for their moves, but as Wolf Richter wrote on WolfStreet.com, “You’d think something earth-​shattering happened based on the media hullabaloo that ensued.” 

Richter noted that the expiration date on the SPVs had already been extended; that their purpose was “to bail out and enrich bondholders, particularly junk-bond holders and speculators with huge leveraged bets”; and that their use had been “minuscule by Fed standards.” They had done their job, which was mostly to be “a jawboning tool to inflate asset prices.” Investors and speculators, confident that the Fed had their backs, had “created wondrous credit markets that are now frothing at the mouth,” making the bond speculators quite rich. However, in Mnuchin’s own words,  “The people that really need support right now are not the rich corporations, it is the small businesses, it’s the people who are unemployed.” So why aren’t they getting the support? According to Richter,