Mark Lennihan/AP Photo
Unsanitized-061620
The New York Stock Exchange may be soaring, but state and local budgets will crash the economy without dramatic action.
First Response
Let’s juxtapose two events that have been occurring over the past several weeks. First, it’s clear that state and local governments have no way to make up for severely collapsed revenues in the first half of the year without massive assistance, or else cut millions of jobs and curtail services and create the greatest immediate threat to economic recovery. Second, the week of June 8 was mildly bad for stocks, mainly because coronavirus cases are rising in numerous states.
Let’s then say that you are the chair of the nation’s central bank, with the power to affect both of these outcomes. Given your mandate to maximize employment, which should be the top priority?
If you said “help get those stocks moving” then you are, in fact, the chair of the Federal Reserve, and you just set up a process to automatically and indiscriminately buy corporate bonds. The Fed plans to buy a portfolio of bonds on the secondary market, really building its own investment fund. The central bank also launched its Main Street Lending Program, direct loans for companies with up to 15,000 employees, including nonprofits, which were recently added. Stocks jumped after being way down early in the day; oil jumped too. (Stocks are zooming today because of a 17.7 percent jump in retail sales in May off the cratering in April, which also may explain the case increases, as it’s suggestive evidence of people going back out to shop.)
The Fed has all the authority it needs to support corporate bonds, and it can even do that while also solving the state and local fiscal crisis. But there’s been no similar blockbuster announcement about expanding the Municipal Liquidity Facility, the Fed’s vehicle for purchasing state and local debt. It’s the great dispatch with which it’s going about the asset inflation and the sloth on any kind of municipal help that should distress people about the distributional effects of Congress putting this rescue in the Fed’s hands.
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It’s strange that this is a controversial thing to say. It’s strange that Josh Bivens of the Economic Policy Institute, the largest labor economics organization in America, is giving qualified support to the Fed’s actions, when they quietly eliminated labor protections for the corporate bond purchases and left states and municipalities hanging. After all, this is a fight between labor and capital: the labor of millions of public employees and the capital class rescue that has proceeded without delay.
But that’s not the only perspective out there on the left. In fact, when I wrote Friday about how the Municipal Liquidity Facility or dedicated swap lines could be the savior of state and local governments, I didn’t realize that I had tapped into a mix of activism and wonkery that had been building for the past few weeks. In fact, I was on a call yesterday among supporters of a stronger MLF response moderated by… Josh Bivens of the Economic Policy Institute!
The Center for Popular Democracy, which pioneered grassroots action against the central bank, released yesterday a paper on how the MLF is underpowered by design. As written, only 255 cities, states, and counties would be eligible for the program (and that’s after activist outcry got the Fed to expand from its initial 75). According to the paper, 97 percent of them would be “functionally excluded as a result of highly costly and restrictive loan terms.” That’s right, a grand total of seven municipal entities would find this fund better than the private markets. Terms on these MLF loans are simply much worse than the terms for corporate lending in other Fed facilities, despite the fact that municipal defaults are a far rarer event than corporate defaults.
There are extensive changes to the MLF in the Heroes Act passed by House Democrats that include better terms. Of course the Fed can just make a bunch of changes itself: extending loan terms, capping interest rates, and adding eligible municipalities. But it could also just automate rollovers or extend maturities in a way that makes these still loans in name, but grants in practice. Treasury hasn’t taken a dollar of loss in any Fed credit facility, and stocks seem to be fine. The loss absorption can all go to the munis. It’s not like cities and states brought the pandemic on themselves, so they should not have to endure a penalty rate for needed life support.
The Fed can also institute swap lines, as it did with foreign governments in the financial crisis, under section 14(2) of the Federal Reserve Act. “Our thought is that 14(2) would be far more straightforward here,” says Robert Hockett, a professor at Cornell who’s been at the forefront of this push. “The Fed is resorting to 13(3) (its emergency lending function) mainly because it’s familiar from last time.” The swap lines do not require any interest rate at all. They have to be repaid in less than six months but there’s no limit on rollovers or refinancing. “This is indefinitely renewable funding—and always could have been had the Fed simply used it,” Hockett says.
There’s a concern that pushing the Fed on this will loosen the pressure on Congress to go ahead and make state and local grants. Some conservatives on the Hill have made this excuse. But Trump didn’t list state and local aid among his priorities for the next bill anyway, and would you rather be tactical or solve the damn problem? There’s also the question of state balanced budget limitations, but repeated rollover authority would likely surmount this obstacle. Even short-term lending on favorable terms could get you to the next Congress, and potentially a more favorable chief executive.
Letters are being distributed among city and state officials right now urging the Fed to either fix the MLF or move to a 14(2) swap line with indefinite rollovers. This is an active and extremely worthy fight. The Fed is designed to protect employment and prevent recessions. State and local funding is the biggest threat out there. The Fed needs to do its job, not trifle with asset inflation.
Days Without a Bailout Oversight Chair
81. Meanwhile, inspectors general have noticed that they cannot monitor several CARES Act programs because of quirks in the law’s language. Would be a good time for a Congressional Oversight Commission chair!
Today I Learned
- Trump economic team coalescing around a “back to work” bonus to replace enhanced unemployment. (CNBC)
- Hertz out and out tells investors “you will lose all your money when you buy our stock,” yet is selling more of it. (Bloomberg)
- Pharma bro Martin Shkreli’s former company’s stock soaring because investors for some reason believe the hype about its coronavirus treatment. (Wall Street Journal)
- Hydroxychloroquine no longer an FDA-approved emergency drug. (FDA)
- How will we respond to natural disasters in the middle of a pandemic disaster? (The Intercept)
- “I just feel like if I’m gonna get it I’m gonna get it,” says a young woman whose grandfather died of coronavirus. (Charlotte News-Observer)
- United Airlines uses its frequent-flyer program as loan collateral. (Financial Times)
- Self-checkout likely to expand, making everyone who wants to work while shopping happy. (The Hill)
