Politics

Mnuchin's Fed move is like stripping Titanic of its lifeboats, economist says

Key Points
  • U.S. Treasury Secretary Steven Mnuchin decided to allow key pandemic relief programs to expire on Dec. 31.
  • The move is expected to drastically reduce the central bank's ability to shore up the financial system.
US Treasury Secretary Steve Mnuchin walks out of Senate Majority Leader Mitch McConnell's office at the US Capitol in Washington, DC, on September 30, 2020.
Nicholas Kamm | AFP | Getty Images

U.S. Treasury Secretary Steven Mnuchin's decision to allow key pandemic relief programs to expire is like stripping lifeboats from the Titanic, according to Carl Weinberg, chief economist at High Frequency Economics.

Mnuchin announced Thursday that he will not extend the Federal Reserve's emergency lending programs that used Congress' CARES Act funds beyond Dec. 31. The move is expected to drastically reduce the central bank's ability to shore up the financial system.

The announcement comes as many areas of the country reimplement partial lockdown restrictions in a bid to contain the resurgent coronavirus. The national seven-day average of daily new infections has reached 161,165, according to a CNBC analysis of John Hopkins University data, 26% higher than a week ago. California has ordered a 10 p.m. curfew across much of the state, while New York City has announced the closure of schools.

Speaking to CNBC's "Squawk Box Europe" on Friday, Weinberg suggested that it was difficult to find an "economic rationale" for the decision, with millions of Americans still receiving unemployment benefits, regional Fed indicators softening and further shutdowns likely on the horizon.

"I don't think there is a good economic or public health or social reason to explain why they want to cut these programs at this particular time, so it has kind of got to be politics, doesn't it?" Weinberg said.

The Fed and the U.S. Chamber of Commerce have voiced public opposition to Mnuchin's decision, the latter suggesting it "prematurely and unnecessarily ties the hands" of President-elect Joe Biden's incoming administration.

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Mnuchin's Fed move like stripping lifeboats from Titanic, economist says

Asked whether cutting emergency programs was justified given that only 3% of the $2.6 trillion available funds are in use, Weinberg likened the situation to the Titanic.

"One of the problems was that there weren't enough lifeboats onboard, 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 the economy, these are the places for companies to go when there is no place else to go, whether they are small business or medium-sized businesses, not the big ones that can go to the capital markets, but the little ones."

Mnuchin did extend three programs that did not use CARES Act Funds for 90 days, including facilities that backstopped commercial paper and money markets. Around $25 billion of existing equity from the Treasury will also be left at the Fed from the CARES Act Funds, while the Treasury has about $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 opt to revive the emergency lending programs by establishing a new agreement with the Fed.

Weinberg also cautioned that despite general market optimism on hopes of a vaccine and eventual economic recovery, there is still the "potential for a financial crisis lurking underneath" the economy.

"In the United States, at the end of December, people are going to lose their protection from evictions, they are going to lose income support, they are going to lose forbearance on student loans, and as we fall into this fiscal valley of support for people, we are going to see failures, and those failures as we learned in 2008 can create problems within the financial sector," he said, adding that the crisis was still in its "early days."