Mnuchin's Fed transfer is like taking the lifeboats from the Titanic, says the economist


U.S. Treasury Secretary Steve Mnuchin leaves the office of Senate Majority Leader Mitch McConnell in the U.S. Capitol in Washington, DC on September 30, 2020.

Nicholas Comb | AFP | Getty Images

According to Carl Weinberg, chief economist at High Frequency Economics, U.S. Treasury Secretary Steven Mnuchin's decision is to phase out key pandemic relief programs, such as removing lifeboats from the Titanic.

Mnuchin announced Thursday that he would not extend the Federal Reserve's emergency loan programs, which used funds from the CARES Act of Congress, beyond December 31. The move is expected to drastically reduce the central bank's ability to shore up the financial system.

The announcement comes that lock restrictions are being introduced in many regions of the country to contain the resurgent coronavirus. The national 7-day average of new infections every day has hit 161,165, 26% more than a week ago, according to a CNBC analysis of John Hopkins University data. California has ordered a 10pm. Curfew in much of the state, while New York City announced schools will close.

Weinberg spoke to CNBC's "Squawk Box Europe" on Friday that it was difficult to come up with an "economic rationale" for the decision, as millions of Americans are still receiving unemployment benefits, regional Fed indicators are falling and more shutdowns are likely.

"I don't think there is any good economic, public, or social reason to explain why they want to cut these programs at this particular time, so it has to be some kind of policy, right?" Said Weinberg.

The Fed and the US Chamber of Commerce have publicly spoken out against Mnuchin's decision. The latter suggests that the future administration of President-elect Joe Biden "tie their hands prematurely and unnecessarily".

When asked whether the cut in emergency programs was justified, given that only 3% of the available $ 2.6 trillion is used, Weinberg compared the situation to the Titanic.

"One of the problems was that there weren't enough lifeboats on board and then none of those lifeboats were being used when the boat left the dock, but when you needed them they weren't there," he said.

"These are the lifeboats for business, these are the places businesses can go when there is no other place, whether they are small or medium-sized businesses, not the big ones that can go into capital markets, but the little ones. "

Mnuchin extended three programs that did not use CARES Act funds for 90 days, including facilities that halted commercial paper and money markets. Around $ 25 billion in existing Treasury equity will also remain with the Fed from the CARES Act funds, while the Treasury will have around $ 50 billion in the Exchange Stabilization Fund.

Sources familiar with the decision told CNBC on Thursday that either Mnuchin or a new Treasury Secretary under the Biden administration could revitalize emergency loan programs by signing a new deal with the Fed.

Weinberg also warned that despite general market optimism about vaccine hopes and possible economic recovery, "the potential for a financial crisis lurks beneath the economy".

"In the United States, in late December, people will lose their evictions, they will lose income support, they will lose leniency on student loans, and if we fall into this fiscal valley of support for the people, we will experience failures, and those failures as we learned in 2008, it can cause problems in the financial sector, "he said, adding that the crisis is" in its infancy ".


Katherine Clark