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Mnuchin’s move by the Fed is like depriving the Titanic of its lifeboats: The Economist

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

Nicholas Camm | AFP | Getty Images

The decision by US Treasury Secretary Stephen Mnuchin to allow the pandemic relief programs to be valid is like removing the lifeboats from the Titanic, according to Carl Weinberg, chief economist at High Frequency Economics.

Mnuchin announced on Thursday that he would not extend the Federal Reserve̵

7;s emergency lending programs, which used funds from the Congressional Care Act after December 31st. The move is expected to drastically reduce the central bank’s ability to strengthen the financial system.

The announcement comes as many parts of the country are restoring partial blocking restrictions in an attempt to contain the resurgent coronavirus. The national average duration of daily new infections for seven days reached 161,165, according to a CNBC analysis of data from Johns Hopkins University, 26% higher than a week ago. California scheduled a curfew at 10 p.m. in much of the state until New York announced the closure of schools.

In an interview with CNBC at Squawk Box Europe on Friday, Weinberg suggested that it was difficult to find an “economic justification” for the decision, as millions of Americans still receive unemployment benefits, and Federal Reserve regional indicators are softening further on the horizon.

“I don’t think there’s a good economic or public health or social reason to explain why they want to cut these programs at this particular time, so that should be a policy, right?” Weinberg said.

The Federal Reserve and the US Chamber of Commerce have expressed public opposition to Mnuchin’s decision, offering him “prematurely and unnecessarily to tie his hands” to the incoming administration of President-elect Joe Biden.

Asked if cutting emergency programs was justified, as only 3% of the available $ 2.6 trillion was used, Weinberg likened 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 used when the boat left the dock, but when you needed them, they weren’t there,” he said.

“These are the lifeboats for the economy, these are the places companies can go when nowhere else, whether they are small businesses or medium-sized businesses, not the big ones that can go to the capital markets, but the small ones. “

Mnuchin expanded three programs that did not use CARES Act Funds for 90 days, including facilities that supported commercial paper and money markets. About $ 25 billion of existing treasury equity will also be left in the Federal Reserve from care law funds, while the Treasury has about $ 50 billion in the Stock Exchange Stabilization Fund.

Sources familiar with the decision told CNBC on Thursday that either Mnuchin or a new finance minister in the Biden administration could choose to revive emergency lending programs by establishing a new agreement with the Fed.

Weinberg also warned that despite general market optimism about vaccine hopes and a possible economic recovery, there is still “potential for a financial crisis lurking beneath” the economy.

“In the United States at the end of December, people will lose their protection from expulsion, they will lose income support, they will lose tolerance for student loans, and as we fall into this fiscal valley of human support, we will see failures and those failures, as we learned in 2008. “may create problems in the financial sector,” he said, adding that the crisis was still in its “first days”.

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