George Selgin on the Fed-Treasury Relationship, New Lending Facilities, and the Fed's Evolving Role in Response to COVID-19

Episode Summary

Executive Summary: George Selgin argues the Fed’s crisis lending should be backstopped by Congress/Treasury to respect taxpayer approval and Fed autonomy, but that the current Main Street and alphabet-soup facilities are still the wrong tool for small-business relief. He favors direct, appropriated conditional grants via Treasury/Congress and a simpler set of standing Fed facilities focused on liquidity, not quasi-fiscal lending.

Main Topics: Legality and necessity of Treasury backstops (Priority: 5/5): Selgin defends Treasury equity backstops for Fed risky lending as constitutionally and statutorily appropriate because losses should be expressly appropriated by Congress rather than borne implicitly through the Fed’s balance sheet. Fed autonomy vs. politicization (Priority: 5/5): He argues that backstops protect the Fed’s budgetary autonomy, but risky lending still exposes it to political pressure and mission creep, especially when lending decisions become politically contested. Why the Fed is ill-suited for Main Street lending (Priority: 5/5): Selgin says the Fed is built for lending to financial institutions, not underwriting small-business or quasi-grant programs, which require speed, judgment, and administrative machinery more like a grant agency than a central bank. Historical precedent for business lending failures (Priority: 4/5): He reviews 1930s-50s Fed and RFC business-lending efforts, noting low uptake, high rejection rates, losses, and eventual transfer of small-business finance to the SBA, suggesting today’s effort repeats old mistakes. Conditional grants vs. loans (Priority: 5/5): Selgin repeatedly reframes crisis aid as conditional grants rather than true loans, arguing that treating relief as loans distorts design, overrelies on banks, and obscures the real fiscal cost. Need for simpler standing Fed facilities (Priority: 4/5): He proposes fewer, standing facilities with broader collateral/counterparties and clear triggers, modeled partly on foreign central banks, to reduce the need for ad hoc alphabet-soup interventions in every crisis.

Key Arguments: Congress must authorize any meaningful taxpayer risk; otherwise the Fed would be spending public money without democratic approval. Treasury backstops are not new or extraordinary in principle; they have accompanied Fed risky lending in past crises and in earlier business-lending programs. The scale looks unprecedented mostly in nominal terms; as a share of lending capacity/backstop, current arrangements are not fundamentally different from earlier episodes. Main Street aid is closer to conditional grants than loans, so using banking infrastructure and Fed lending tools is conceptually and operationally awkward. The Fed and banks are poor at processing grant-like relief to small firms; fintechs and flat-fee administrators could do it faster and more cheaply. Leveraging Treasury funds through the Fed creates fiscal illusion; consolidated government costs are not lower, and Treasury borrowing may be cheaper or at least more transparent. Political conditions attached to lending (e.g., wage/dividend rules) deepen the Fed’s exposure to controversy and threaten monetary-policy independence. The Fed’s historical experience in the Depression shows that business lending programs were small, loss-prone, and eventually abandoned in favor of the SBA. A better crisis framework would focus the Fed on liquidity support and reserve provision, while Congress/Treasury handle fiscal transfers and grant-like aid. Standing repo and purchase facilities with broader collateral, counterparties, haircuts, and triggers could reduce the need for improvised emergency facilities in future crises.

Data Points: Treasury backstop for current Fed facilities: $454 billion - Amount Treasury has provided for first-loss protection in the current crisis-era Fed facilities. Additional used from Exchange Stabilization Fund: Earlier Treasury funds also contributed - Discussion notes this $454 billion comes in addition to earlier ESF support. Approximate backstop share: ~10% - Selgin says current Treasury backstops are roughly 10% of authorized risky lending, on average. Unused Treasury backstop: About half unused; $200+ billion remaining - At the time of discussion, Treasury had only used about half of the authorized $454 billion. Fed surplus capital: Under $7 billion - Selgin says Congress has raided the Fed’s surplus capital twice, leaving a small buffer. TALF backstop in Great Financial Crisis: $20 billion - Historical comparison for Fed backstops during the 2008 crisis. Current TALF backstop: $10 billion - Current program backstop cited as smaller in nominal terms than 2008 TALF. Great Depression 13.3 loans: 123 loans - Selgin notes the Fed made only 123 loans under Section 13.3 during the Depression. Fed 13.3 lending authority in Depression: $280 million - Maximum lending authority available during that era. Fed loans outstanding by 1939: Under $60 million - Peak outstanding amount under the Fed’s business-lending authority in the Depression era. Cumulative loans vs authority: Never more than half of authority - Selgin says the Fed never used even half of its available business-lending authority. Treasury backstop used in Depression program: $27 million of $140 million - Amount of the Treasury backstop actually drawn against by 1939. Rate of return on 13.3 loans: -3% - Selgin cites a negative return on the Fed’s Depression-era business loans. Current small-business lending authority: Up to $600 billion - Authority discussed for the Main Street lending program. Current Treasury backstop for Main Street programs: $75 billion - Backstop available to absorb losses on the Main Street facilities. PPP allocation in CARES Act: $349 billion - Amount initially allocated to the Paycheck Protection Program. Airline support in CARES Act: $50 billion - Additional grant-like support for airlines mentioned in the relief package. Total grant-like relief discussed: About $400 billion - Selgin and Beckworth discuss the scale of grant-oriented aid in the CARES Act. Fed reserve interest rate: 10 basis points - Current rate on reserves, cited in the discussion of funding costs and leverage. Main Street loan terms: Up to 5 years historically; about 4 years now - Comparison between past Fed business-lending terms and current Main Street structures.

Pivotal Quotes: "backstops are necessary" — George Selgin: Selgin’s core position on why Congress/Treasury must provide first-loss protection for risky Fed lending. "These aren't loans, these are conditional grants." — George Selgin: His central reframing of small-business relief and why traditional bank lending logic does not fit the program. "No job for banks." — George Selgin: Title/theme of his forthcoming article arguing banks are poorly suited to administer grant-like small-business aid.

Implications: Listeners should expect future crisis policy debates to focus on who should bear losses, how relief should be delivered, and whether the Fed should retreat from quasi-fiscal lending. Selgin’s preferred model shifts aid to Congress/Treasury and reserves the Fed for liquidity operations.