Unsanitized: The Federal Reserve Can End the State Fiscal Crisis Today

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Jacquelyn Martin/AP Photo

Unsanitized-061220

Federal Reserve chair Jerome Powell has all the authority he needs right now to refill state and local government budgets.

First Response

Stock markets are bouncing back today after a massive 1,800-point loss on Thursday. But volatility like this with wild swings up and down is what we saw in February and March, when investors learned there was a world outside their trading desks that might be brutalized by a pandemic. In recent days the market has made no sense; when a company (Nikola) with no product and no revenue can get to a $21 billion valuation, when another company (Hertz) is bankrupt but wants to sell $1 billion in shares because its stock was bid up since it filed for liquidation, something was going to give.

The ostensible cause of yesterday’s jolt was the threat of a second wave of cases (the first wave never stopped, so more like the second first wave). But there’s enough real-economy pain right now to recalibrate expectations. Boeing delivered a grand total of four jets in May, the lowest in six decades. There will be no demand for replacement planes on the horizon. The owner of Men’s Wearhouse is flirting with bankruptcy protection, the latest in the retail fallout. One-third of all malls are predicted to disappear in the next year.

More important, all of the Congressional actions aimed at the real economy are temporary, and will run out over the next six weeks. The one-time checks are done. Some evictions and foreclosures are under moratoria that run out between August and October; federal student loan payments and mortgage forbearance also run out around that time.

Small business grants were only ever intended to last eight weeks, and we’re beyond that. The local coffee shop I spent way too much time in during college closed for good; PPP just wasn’t designed for a sustained downturn. The $600 boost in weekly unemployment payments expires in July, and Republicans, as I’ve reported, consider it a disincentive to work and want it to run out.

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Most important, there’s the bite of state and local government cuts. Government job losses totaled 1.5 million in the past two months and there are more on the way, as the fiscal year in most states begins July 1. This also disproportionately affects African Americans, who are more likely to be public employees. The National Governors Association has asked for $500 billion from Congress consistently over the past two months, seeing this coming down the road.

But Bernie Sanders didn’t call it the worst do-nothing Senate in American history for nothing; they’ve been unmoved to act on the House-passed Heroes Act. Treasury Secretary Mnuchin acknowledged the need for more fiscal support this week, but in his mind that appears to mean the equivalent of coupons for the travel and leisure and restaurant industries. Congress and the executive branch are not to be relied on.

That leaves us with the Fed, whose relief has been channeled toward the investor class when there’s a real-economy nightmare developing. But they’re in a position to particularly help out in one crucial area, and prevent depression from emerging.

As we know, the Fed has spent next to nothing out of its $4.5 trillion money cannon, using it as a a signal to restart capital markets. Those markets are doing well enough now, but as I said, state and local governments are presented with collapsing tax revenues. The Fed has a Municipal Lending Fund that they’ve used exactly once, to give a $1.2 billion loan to the state of Illinois.

The MLF is a $500 billion fund. Under the self-imposed rules of the emergency credit facilities (governed by Section 13(3) of the Federal Reserve Act), the $454 billion stake from Treasury authorized by the CARES Act must absorb losses from the loans they make. So they could shut down the other credit facilities entirely and tweak the MLF, eliminating the interest rate and making principal payments optional or extending the maturities to 200 years or some other function that makes them effectively grants, with Treasury eating the losses. In other words, the $500 billion that the National Governors Association wants is mostly available, from the Fed, and all it would take is a simple announcement to distribute it.

Can the Fed do this? Absolutely, they’ve been changing the MLF on the fly this entire time. And as Fed expert Nathan Tankus pointed out to me, the Fed could even use its Section 14(2) authority to establish unlimited credit lines for state and local governments, up to the limit of the prior year’s budget. If this credit line is never repaid, so be it. “The key here is the loss protection provisions people are all invoking are on 13(3) lending,” Tankus explained. “There are no such provisions for any of their section 14 purchase authority so absent the intervention of a Fed general counsel, they can make purchases as necessary to conduct monetary policy without any consideration of losses.”

If the private markets have reinvigorated themselves, the Fed can turn to the actual area needing support and conduct its monetary policy there. Then we don’t have to wait on a sclerotic Congress to make the sausage. This would have the added benefit of being the biggest federal intervention into the protection of black lives and black livelihoods in recent history, by saving the jobs of a disproportionately black workforce. If they don't take this step, then all the talk of the Fed as a neutral crisis manager just doing its best under its mandate to support employment was simply a defense of capital class oligarchy.

To be clear, the Fed could end the state and local government crisis today. This would spur economic recovery more than any single thing right now. And if the business sector falters, they can go petition Congress for another bailout. Or there might have to be some equity in how losses are distributed.

Odds and Sods

I checked back in on the Donna Shalala story yesterday. You may remember that she’s had some problems disclosing her stock holdings. Well, there’s a coda to this story that involves more lying from their office. I did a tweet thread about it, I don’t want to rehash it here, so just check that out.

Here’s video of the event I did last week with the Open Markets Institute, “Building a Pro-Worker, Anti-Monopoly Movement.”

I was also on KALW’s Your Call radio with Rose Aguilar and ProPublica’s Jesse Eisinger, talking about the crisis and the rescue packages. Listen here.

You can read all of our coronavirus coverage at prospect.org/coronavirus. And email me tips, comments, and perspectives.

Housekeeping

I have a new book coming out in a month. It’s called Monopolized: Life in the Age of Corporate Power. It was completed well before the coronavirus hit, but if anything it’s more relevant, as this crisis has punished the small business sector and propped up large corporates, and shown the danger of concentrated supply chains. I’ve been writing about monopolies for several years, and in this book I traveled the country (back when you could) talking to people living through the consequences of monopoly: farmers, rural Americans without broadband, families of opioid victims, ordinary people touched by monopoly in ways that go way beyond prices for goods and services. You can pre-order the book on Indiebound or wherever you buy books. And as events come on the schedule I’ll let you know about them.

I also want to note that we’re switching to a Postal Service schedule (in solidarity) for Unsanitized. We will no longer produce a Sunday edition. Check back tomorrow for our weekend coverage.

Today I Learned

• Trump seeking legal immunity to put his biggest supporters at risk of coronavirus at indoor rallies is an… interesting way to kick off a campaign. (New York Times)
• “We can’t shut down the economy again,” says Mnuchin in a blanket statement. More on this later. (CNBC)
• Meanwhile, Oregon Governor Kate Brown hits pause on opening up the economy, citing a rise in positive cases. (Oregonian)
• Interesting analysis of unemployment claims in California. (CA Policy Lab)
• The property and casualty insurance industry is lobbying hard to not pay out any claims. This is a huge fight. (Reuters)
• Speaking of Nathan Tankus, this is a decimation of the theory that there’s a “next financial crisis” in collateralized loan obligations. (Substack)
• NBA beat reporters might be locked up at Disney World for months if they want to cover the playoffs live. (Daily Beast)