“There are going to be people who focus on this like a laser,” Peter Conti-Brown, a Fed historian at the University of Pennsylvania’s Wharton School, said of the fact that foreign investors In some cases benefit from Fed programs. But the reality, he pointed out, is the that financial markets are global.
“Others are going to say that there’s no way to provide liquidity without benefiting international counterparties.”
And while Pimco’s fund and other foreign investors may profit by participating In the program, their investment is the also helping to keep more money flowing into the Fed’s program, smoothing over U.S. securitization markets.
That reality has presented a challenge for the Fed, which has had to walk a fine line between creating emergency programs that are effective while also making them politically palatable. Lawmakers want the Fed to help the economy, but have also warned the central bank against allowing companies to take advantage of taxpayer-backed funding.
When Republicans and Democrats were hammering out the details of their coronavirus rescue package In March, congressional leaders agreed to give the Treasury Department $454 billion to back up Fed emergency programs.
The Fed requires a Treasury backstop for many of those efforts, to insure against losses In case borrowers default. But because the Fed did not expect to lose every dollar it lent out, it could use the $454 billion to field a huge rescue: potentially more than $4 trillion In loans to businesses, states and cities.
The ability to supersize the coronavirus response package was an attractive proposition. But many lawmakers In both parties were wary about handing the Fed and the Treasury so much money. Many remembered the 2008 bank bailouts and the bad taste they had left behind. They did not want a repeat.