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March 22, 2020, 12:32 p.m. EDT

Congressional Republicans sought to curtail the Fed’s lending power — now they embrace it

GOP has in the past argued that the Fed had too much power to make loans

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By Jonathan Nicholson

Getty Images/iStockphoto
U.S. Capitol as seen from a sparsely populated National Mall.

Congressional Republicans were against the Fed’s emergency lending authority, until they were for it.

Using the central bank’s power to serve as a lender of last resort is a key plank in the Senate stimulus package, with Treasury Secretary Steven Mnuchin saying he expected industries eligible for help to have as much as $4 trillion made available.

While the program would leverage a much lower amount of actual cash appropriated by lawmakers to hit that target, GOP lawmakers and officials are aware it could bring back memories of the 2008 Troubled Asset Relief Program used to bail out the banking industry.

Their solution? Praise TARP and the Fed’s lending power but also say this is something different.

Sen. Lamar Alexander, R-Tenn., said TARP was seen as a bailout “only because people wrote it that way.”

“TARP made money,” he said. “All the TARP money got paid back.”

“I think, one, it’s lending, so, like TARP, you’d hope you get paid back,” said Sen. Rob Portman, R-Ohio. “Second, it involves both Treasury and the Fed.”

Eric Ueland, the White House’s director of legislative affairs, also was at pains to distinguish what the stimulus plan would do as compared with TARP. “Look, what happened in 2008 was an entire industry had run out of control and threatened to bring down the entire United States economy,” he told reporters Saturday.

“This is not bailing out specific banks or a specific sector of the economy, the financial sector. Instead what we’re doing is we’re dealing with a broad-based public health challenge, and so dealing with a broad-based economic challenge that comes along with dealing with that public health challenge.”

The program would use the Fed’s Section 13(3) powers, named after the provision in the law that set up the central bank. That power was pared back in 2010 after lawmakers were surprised by the Fed’s unilateral use of the power in 2008 to prop up insurance giant AIG /zigman2/quotes/203700638/composite AIG +1.43% and to support the acquisition of Bear Stearns. The Fed also tailored assistance to Citigroup /zigman2/quotes/207741460/composite C -0.91% and Bank of America /zigman2/quotes/200894270/composite BAC -0.73%  .

In 2010, Congress restricted the Fed’s assistance to individual failing businesses but maintained the Fed’s ability to create broadly based lending programs.

Republicans pressed for further limits. At the time, Senate Majority Leader Mitch McConnell said Dodd-Frank didn’t go far enough. “The bill gives the Federal Reserve enhanced emergency lending authority that is far too open to abuse,” McConnell said.

In 2015, the then-Republican-led House passed a bill to further restrict the Section 13(3) power, but it stalled in the Senate.

The nonpartisan Congressional Budget Office said in April 2019 that the net cost of TARP was about $31 billion, well below the $700 billion price tag originally associated with the bailout. It said the banking portion actually offset losses in programs meant to prevent home foreclosures and preserve the U.S. automobile industry.

Critics say the method of measuring TARP’s performance is too lenient.

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