The COVID crisis has been an economic, as well as a public health, disaster, and the US government has responded to it by trying to loan money to as many institutions as it can, offering corporations, cities, states, banks, foreign central banks, and nonprofits access to cheap credit. The lending has been routed through the Federal Reserve Board, making the nation’s central bank not just a resource for banks, but a backstop for the entire economy. The deputization of the Fed, with the assistance of the Treasury Department, as an unfettered economic firefighter is something that can perhaps be legally justified, given that both agencies’ governing statutes were promulgated almost a century ago, when Congress freely established administrative authorities, and provided them with broad scope to regulate as they wished. Nonetheless, the unprecedented steps taken by the Fed need to be endorsed by the legislature much more clearly. Treasury’s role should be clarified, and both should be paired with some safeguards.

The interventions have been dramatic. They have required choices about who is entitled to a rescue and who is not, they have benefited firms over individuals and big and small businesses over medium sized ones, and they represent a novel role for a central bank. 

In The Government’s Economic Response to the COVID Crisis, I catalog all of the interventions made by the Fed and Treasury in response to the COVID pandemic and address some of the legal boundaries with which those interventions have had to be reconciled, for better or worse. The article thus offers a first draft of the legal history of the response to the crisis and also drives home the way that financial regulators have stretched the bounds of their authority to enact their rescue strategy. 

Three strategies in particular are worth evaluating.  The first involved the attempted use of emergency lending to either unfreeze capital markets, which has worked, or to make loans to a variety of businesses and local governments, which has not.  This type of lending was legally justified by the thin reed of Section 13(3) of the Federal Reserve Act and basically endorsed by Congress in the CARES Act, contributing to the validity of the exercise.  The second was the flooding of the world with dollars through swap lines with friendly foreign central banks and repo transactions with less friendly ones.  Here, the legal justification is even more tenuous, especially given the amount of the lending.  Finally, the economic regulators have encouraged banks to lend through an explicit and implicit program of regulatory forbearance, which lies within their statutory authority but has been discouraged by Congress.

The regulation-by-credit part that the Fed and Treasury have taken in this financial emergency more broadly calls into question the role of legal constraint when emergencies arise. Some scholars posit an executive unbound when it comes to the crisis response, given the comparative advantages executives have over the legislative and judicial branches.  In my view, the Fed and Treasury have pushed the law, rather than ignoring it.  Law, it turns out, matters, but that only makes the case for the delineation of the Fed’s and Treasury’s role in crisis response all the more compelling.

David Zaring is Professor of Legal Studies & Business Ethics at The Wharton School, University of Pennsylvania.