The Constitution and the Fed after the COVID-19 Crisis

Abstract

The COVID-19 financial response brought a seismic shift in the allocation of authority between Congress, the Treasury, and the Federal Reserve. According to the classic division of labor, Congress claims the “power of the purse” or the constitutional authority to appropriate public funds; the Treasury holds responsibility over the spending and taxing that puts those orders into effect; and the Federal Reserve engages in money creation as part of its role making monetary policy and acting as lender of last resort. Drawing on that theory of separated powers, the essay reconstructs the traditional ways of thinking that distinguished money creation by the Fed from the congressional power of the purse. Most notably, approaches to the Fed have downplayed the distributive implications of its money creation powers by casting them as merely a stabilizing force, either backstopping private lending in times of panic or maintaining the health of credit markets more generally. We then analyze the COVID-19 liquidity facilities at the heart of the Federal government’s response to the current crisis. Established by the Fed, these facilities are shaped in non-transparent ways by the Treasury’s authority to protect the Fed from losses. With only $450 billion in congressional appropriations, the facilities are anticipated to lend $4.5 trillion, an amount the size of the 2019 federal budget. In our view, the facilities collapse the traditional narrative that distinguished Fed money creation from congressional appropriations. We conclude that that traditional narrative was problematic from the start. Congress’s inability to take responsibility over Fed credit support calls for a more structural reform in our financial system- one compatible with democratic governance and distributive justice.

Keywords: COVID-19, Federal Reserve, Constitution, Lender of Last Resort, Monetary Policy, Distributive Justice, Quantitative Easing

JEL Classification: E5, G23, P16, G01