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The battle over the bailout—set to be delivered through a once-obscure Treasury Department mechanism called the Exchange Stabilization Fund—has only just begun.

On Friday Congress passed the largest financial relief bill in its history, the Coronavirus Aid, Relief and Economic Security (CARES) Act, a $2 trillion dollar stimulus designed to bolster businesses and provide aid to Americans facing economic hardship amid the coronavirus pandemic. A large portion of that money will be going directly to taxpayers—most adults will receive one-time government payouts of $1,200—as well as to expanding unemployment insurance, which record numbers of newly jobless Americans are now turning to.

Few people have heard of the Exchange Stabilization Fund, but it just became the most important slush fund in government.

But apart from that, the largest allocation—approximately $500 billion—is going to Treasury Secretary Steven Mnuchin to bail out corporate America. The majority will be passed along to the Federal Reserve, which will leverage the cash infusion for more than $4 trillion in lending to big business. A variety of legal and financial analysts have indicated that the mechanism for this transfer will be a little-known entity called the Exchange Stabilization Fund. Few people have ever heard of this fund, controlled by the Department of the Treasury, and there’s little reason they should have. A low-profile entity that has existed since 1934, it was not envisioned by its creators to be a major tool for public spending. And yet it just became the vehicle for the most important slush fund in government.

We know from past precedent that large-scale bailouts often empower new mechanisms for public action—sometimes freshly created agencies, sometimes existing mechanisms that take on dramatic new importance. Relevant examples range from the Reconstruction Finance Corporation of the New Deal era, to segments of the Federal Reserve used to bail out some of the nation’s largest corporations in the 1970s, to the Troubled Asset Relief Program (TARP) created after the 2008 crash. In terms of what these bailouts look like in practice, fights over the administration and oversight of these agencies can be as critical as the funding that is allocated at the outset—and sometimes even more important.

Democrats were right to demand oversight of the fund in congressional debate about the stimulus bill. They won some important concessions that stop this from being a pure corporate giveaway. But history suggests that they should be prepared for an ongoing fight. Those who wish to restore a degree of democracy to our highly concentrated, centralized, and unequal economy must push not only for greater oversight, but for further demands to make the most business-friendly branches of government focus instead on the economic well-being of American workers.

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Financing an Economic Reconstruction

The Exchange Stabilization Fund, or ESF, now being used by the Treasury was established by Congress in the Gold Reserve Act of 1934 on behalf of Franklin Roosevelt’s administration. Its purpose was to manage the foreign value of the nation’s currency. Authorized to deal in gold, foreign exchange, and “other such instruments of credit and securities” as the Secretary of the Treasury might feel necessary to “stabilize the exchange value of the dollar,” the fund was initially given $200 million. For decades it generally attracted little attention, although it occasionally made the news, as when Bill Clinton used it as the U.S. government’s instrument to bail out the Mexican peso in 1995.

Fights over the administration and oversight of these agencies can be as critical as the funding that is allocated at the outset—and sometimes even more important.

Providing major financing to keep the corporate sector afloat, however, was never in the purview of the ESF. Instead, the New Deal agency that functioned most similarly to the current rescue package—and that provides an important point of reference in current debates—was the Reconstruction Finance Corporation, or RFC. This was a government corporation empowered to make loans, buy stock, and issue bonds to raise its own financing. Created under Herbert Hoover in 1932 with $500 million from Congress, it was originally envisioned as a means of stabilizing the nation’s corporate bond market. Congress quickly doubled its borrowing power and repeatedly extended its investing responsibilities, and, according to the historian Jordan Schwarz’s book The New Dealers: Power Politics in the Age of Roosevelt (1993), under Roosevelt the corporation would disburse more than $11 billion by 1936.

Jesse Jones, the Texas businessman who Roosevelt put in charge of the corporation, has been described by Schwarz as “the single most powerful man in the New Deal,” after the president himself. Although hardly a friend to organized labor, Jones was not beholden to Wall Street and was willing to use public muscle not merely to shore up existing businesses, but also to finance projects in the public interest that the market on itself was unwilling to support—ranging from the Farm Credit Administration that saved millions of rural families from foreclosure to the Rural Electrification Agency that brought electricity to regions that had been consistently neglected by utility companies. It also kept both the cities of Chicago and New York solvent, at one point financing the entire back pay due to the 15,000 teachers in the Chicago public schools.

As Brent Cebul, Assistant Professor of American History at the University of Pennsylvania, says, the RFC was “absolutely essential to some of the fundamental reforms the New Deal put in place.” It was similarly essential during the Second World War, when it built and owned nearly 90 percent of the nation’s aircraft, shipbuilding, and munitions industries, and when it almost single-handedly financed the nation’s nitrate and synthetic rubber industries.

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Reviving the RFC?

A number of prominent progressives and liberals have recently raised the prospect of reviving the RFC. Writing in the Boston Globe, economist James Galbraith and writer Michael Lind proposed the creation of a “Health Finance Corporation” that could serve an efficient, centralized “federal agency to manage resource allocation and the financing of the response.” This would involve providing funding to prop up the country’s medical systems, as well as keeping essential elements of the economy functioning. Their envisioned agency would be authorized “to buy equity in firms whose survival or rapid expansion is needed to combat the pandemic and stabilize core economic activities, such as utilities and other basic services.” Writing along similar lines in the New Yorker, John Cassidy called for a “Coronavirus Finance Corporation” that could operate independently of the White House and the Treasury Department to provide targeted support to businesses, with the public receiving equity in return—a key feature of the New Deal agency on which the proposals are modeled.

The oversight provisions essentially mirror those put in place to review TARP—and these proved entirely inadequate.

Instead, the Republican-led Congress has opted for a more generalized bailout for corporate America, which includes likely infusions of public financing for many businesses that have done nothing to deserve such support. In this respect, it follows the model of TARP, which was created after the 2008 financial crisis. “What is happening is a bailout,” Galbraith says. “Basically it is driven by the same interests in Washington.”

Of the $500 billion that Congress is sending to the Treasury to prop up big business, $46 billion will be lent directly, with the majority going to the airline industry and the remainder divided between companies deemed “important to maintaining national security.” But the lion’s share, a total of $454 billion, will be provided by the ESF to the Federal Reserve. Even before the Treasury received new money from Congress, it had begun using existing ESF holdings to launch an initial bailout—backing the Federal Reserve in propping up the corporate bond market. Reporting on the additional infusion of funds by Congress, the Sovereign Wealth Fund Institute noted, “By the CARES Act, U.S. Exchange Stabilization Fund Gets Big.” Because the Federal Reserve may leverage the new money at a ten-to-one rate, the fund available to support corporate America will actually total in excess of $4 trillion — big indeed.

“It’s a workaround essentially,” Galbraith says. “The Republicans didn’t want a new agency.” Instead, they created a slush fund that can be deployed with little transparency or Congressional involvement.

Prior to the passage of the CARES Act, Damon Silvers, who served as deputy chair of the Congressional Oversight Panel established after the 2008 bailout, had warned against duplicating the mistakes of TARP. “Then as now, big banks and big companies wanted money without conditions,” he wrote. “And with no conditions on how they employed the public’s dollars, the banks were allowed to bleed homeowners to rebuild their capital, small-business lending dried up for years, and ten million American families—40 million people, millions of children—were foreclosed on and driven from their homes.”

During last week’s Senate debate, Democrats expressed skepticism about a repeat of the George W. Bush–era rescue program. “We’re gonna give $500 billion in basically a slush fund to help industries controlled by Mnuchin with very little transparency? Is that what we ought to be doing?” remarked Hawaiian Senator Mazie Hirono.

Such hesitant lawmakers rallied enough resistance to win some oversight over CARES spending, as well as some conditions on how corporations receiving public backing can use the support. Democrats successfully inserted language establishing an Office of the Special Inspector General to review pandemic spending, as well as a Congressional Oversight Commission. More intriguing, they won mandates stating that, for twelve months after the completion of a public loan, any business receiving assistance will be prohibited from purchasing their own stock or paying dividends. Managers at recipient firms who made more than $425,000 in 2019 will have their salary rates frozen for twelve months after the loan and will have any severance packages capped at twice their 2019 total compensation. Some additional restrictions apply to compensation for those making more than $3 million. Moreover, businesses run by family members of Donald Trump or others in high office will be barred from receiving assistance.

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Beyond Oversight

While not insignificant, these controls hardly go far enough. The oversight provisions essentially mirror those put in place to review TARP—and these proved entirely inadequate. The Congressional Oversight Panel, Silvers argues, “was purely advisory. It had no subpoena power, and it could not swear in witnesses. Officials came in front of us and lied with impunity.” To the extent that the panel is remembered today as an effective watchdog, Silvers explains, “that was due really only to the enormous work put into it by [Elizabeth] Warren, my fellow board members, and the staff.” Indeed, with the current bailout, Trump has already suggested that he could gag the inspector general from making public any reports.

Democrats won some important concessions that stop this from being a pure corporate giveaway. But history suggests that they should be prepared for an ongoing fight.

Such statements make clear the need not only to ensure current oversight provisions are exercised to the fullest extent possible, but also to get Congress to push for even greater controls. One lesson from the RFC—which started small but then had its powers expanded in 1933, 1934, 1936, and 1938—is that major struggles over the scope and independence of bailout agencies have continued to occur well after their initial establishment, particularly when these offices have required renewed funding. Amid the current pandemic, this is something that Treasury Secretary Steven Mnuchin has predicted could happen in as little as ten to twelve weeks.

But the vision should also extend beyond oversight. In the case of the RFC, the government assumed equity in corporations in exchange for public support. And the agency was not afraid to use this equity to assert a forceful voice in corporate management. “In many cases, it put real stipulations in place in terms of governance—including caps on executive pay,” says Cebul. During TARP, the government did receive stock in bailed-out banks, but they were explicitly designed to be non-voting shares, denying the public a voice in managing bank behavior. The current slush fund may be even worse than TARP, as the public may not receive any equity at all for many of its loans and loan guarantees.

As a result of a lack of government control, we have little reason to believe corporations will continue to retain their workers—ostensibly the key goal of keeping corporate America afloat. Corporations in the airline and national security industries receiving the $46 billion directly from the Treasury are required to maintain “employment levels as of March 24, 2020, to the extent practicable, and in any case shall not reduce its employment levels by more than 10 percent.” This requirement undoubtedly reflects both the high level of organization among unionized workers in the airline industry, and the public stake the federal government will inevitably take. But for large corporations receiving indirect support via the money channeled through the ESF and leveraged through Federal Reserve borrowing, no such firing freeze exists.

Although a revival of the RFC may not be in the cards, those looking to democratize the economy should remain alert to the possibilities that the current bailout arrangements present. In addition to demanding public equity and public influence over governance in exchange for the assumption of corporate risk, lawmakers should look at mechanisms like the ESF-Fed arrangement as an opportunity to use the powers of the Federal Reserve for good, rather than to merely meet the needs of Wall Street. Writing in the Washington Post, financial analyst and bond trader Jim Bianco has suggested that the new relationship between the Treasury Department and the Federal Reserve that has been established by the bailout risks creating a dangerous overlap between the two institutions. The use of the Exchange Stabilization Fund to buy securities and backstop loans, with the Fed “acting as banker and providing financing” means that “the federal government is nationalizing large swaths of the financial markets,” he contends. “This scheme essentially merges the Fed and Treasury into one organization. So, meet your new Fed chairman, Donald J. Trump.”

Those looking to democratize the economy should remain alert to the possibilities that the current bailout arrangements present.

Certainly, the Trump administration, in claiming new powers of economic management, can hardly be trusted to act in the best interest of American workers. But an autonomous Federal Reserve can hardly be relied upon either. Sober historical evaluation reminds us that it was only in 1951 that the Federal Reserve secured its independence from the Treasury—and then as an agreement between the beleaguered Truman administration and an empowered business community eager to retain control over interest rates to choke off employment booms at a moment when organized labor was at its historic peak. The public restoration of Federal Reserve and Treasury interdependence dispels the illusion that has undergirded central bank policy since the 1970s: that there is such a thing as an apolitical realm of “financial expertise.” When it is no longer possible to argue that “the economy” is separate from—and holds priority over—politics, we have reached a moment that holds significant potential for future governments.

In other words, the battle over the bailout, and the wider struggle over the shape of a post-pandemic economy, has only just begun.