Mary Altaffer/AP Photo
Unsanitized-091820
The Federal Reserve Bank in New York City, which is undergoing furloughs right now due to COVID-related revenue shortfalls
First Response
The four-member Congressional Oversight Commission (see Days Without a Bailout Oversight Chair, below) met yesterday in a hearing discussing the Municipal Liquidity Facility, a $500 billion program designed to not give loans to state and local governments. At least that’s how it works in practice; only a handful of such governments are eligible for the facility, and of those, about 97 percent are “functionally excluded” due to the program terms. Five months after being established, the MLF has granted two loans.
The Fed knows that state and local government austerity represents one of the biggest threats to digging out of recession. Mark Zandi of Moody’s predicts shortfalls of up to $650 billion, and a failure to address this will lead to 3 million job losses and 3 percentage points off GDP. “It will hold back the economic recovery if [states and localities] continue to lay people off, and if they can continue to cut essential services,” is not something I wrote, but what Jerome Powell, the chairman of the Fed, said in April. The central bank has a mandate to maximize employment. And it wants… someone else to handle it, despite it being clear to anyone with access to the internet that nobody else will.
Kent Hiteshew, the Fed official managing the MLF essentially said yesterday that governments can borrow privately, and their facility is only a last-resort backstop. Republicans on the commission agreed and said that the program should be dismantled, as the private market has been “restored.”
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Bharat Ramamurti, a commissioner on the panel, cited Philip Morris corporate bonds that the Fed has purchased on the secondary market, with an interest rate under 1 percent and payback terms of four and a half years, comparing it to MLF loan terms, at twice the interest rate and shorter terms, for states with the exact same credit rating as Philip Morris. Hiteshew replied, essentially, “not my job.” Specifically he said, “You and I both agree that the serious condition of state and local government balance sheets needs to be addressed… we believe that monetary policy has limited capacity to do that.”
Hiteshew then made this argument you see sometimes where he says that the Fed buying loans on the secondary market isn’t equivalent to making loans on the primary market, but of course both credit facilities were set up under the same terms. This is what I was trying to get at imperfectly a couple days ago, when talking about prices paid for bonds. Prices of bonds tend to go up as interest rates go down, and I shouldn’t have used a par value comparison. But the price paid by the Fed is a policy choice; when they have unlimited funds to spend, they have the ability to set a price. It’s the same policy choice they’re making by choosing to add a penalty rate to state and local governments, ensuring that taking a loan won’t be attractive. The interest rates offered to municipalities were too high, and the Fed dropped them amid an outcry. The payment terms are too short, and the Fed yesterday admitted the ability to change that (they’re offering longer terms on primary market loans in the Main Street Lending Program). In fact, they have the choice to go completely outside the MLF.
As I’ve stated a number of times, under Section 14(2) of the Federal Reserve Act, the Fed could extend six-month notes to cash-strapped governments and commit to rolling them over for 20 years or more, becoming what amounts to an operating deficit for entities that cannot otherwise run one. There’s a question as to whether localities are barred by statute or state constitutions from borrowing, but nearly all have an exemption over the short-term, which is what this would be, just extended. To the extent changes are needed, a signal from the Fed that there would be a good reason to do so would help.
The signal received is “go talk to Congress.” But Congress gave the authority under the Federal Reserve Act and the CARES Act to fashion a more creative solution. They’re not taking it, and the inequality shock we’re seeing right now is the result. That’s to be expected given the Fed’s orientation to serve the powerful. They are making policy choices that enrich those who have little need to be further enriched, and other policy choices that stiff the needy. This asset price inflation is intended to trickle down and support jobs, but companies taking advantage of it are also engaged in mass layoffs, so that channel appears broken. Jared Kushner wanted the market to decide recovery, and Congress took him up on it.
This is and has always been my main point: by relying on the Fed, we’re getting a maldistribution of the benefits of recovery. You’d have to be willfully blind not to see that. As I’ve said repeatedly, that’s a failure of Congress, and it’s depressing that their inaction forces us to impotently argue about this. Congress handed over the largest aspect of its relief package to an organization that has always catered to financial actors and large corporations over ordinary people. It gave long-term relief to the wealthy and temporary, expired relief to everyone else. We’re living with the result.
Comic Relief
See also this delightful sequence between Ramamurti and Chris Edwards of the Cato Institute, who was there to claim that state and local governments have no financial problems, and that boosting them with any financial relief wouldn’t benefit the economy. He got to that last point by asserting that a University of California professor wrote a paper showing no real benefit for state and local relief. Ramamurti called the professor, who told him otherwise. It’s the monetary policy equivalent of pulling Marshall McLuhan out from behind the movie posters in Annie Hall. Give it a watch.
Days Without a Bailout Oversight Chair
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Today I Learned
- One pandemic consequence will be a sharply reduced regional airline schedule, so companies are pulling their headquarters out of smaller cities. (Atlanta Journal-Constitution)
- The Navajo Nation is doing a far better job handling COVID than the federal government. (NPR)
- Moderna’s protocols for vaccine development says they won’t even analyze Phase 3 trial data until December. Phase 3 timelines are what they are. (New York Times)
- COVID is now resuming in Europe; France’s caseloads are higher than the U.S. at the moment. Bad signal for a fall wave in northern climates. (CNN)
- A federal judicial injunction against the Postal Service changes that caused the summer slowdown. (Seattle Times)
- California becomes the latest state to pick up the slack for OSHA’s terrible neglect, creating a state coronavirus safety standard. (Los Angeles Times)
- Airline worker rates of infection actually lower than the general population, though they don’t sit down next to passengers of course. (Business Insider)
- Potential overcounting in continuing unemployment claims. (New York Times)
