Graeme Jennings/Pool via AP
Treasury Secretary Steve Mnuchin testifies before the House Select Subcommittee on the Coronavirus Crisis, September 1, 2020, on Capitol Hill.
When Congress enacted the CARES Act in March, it included half a trillion dollars for the Federal Reserve to support private lending and credit creation. That money, in turn, could leverage several trillions of dollars of economic activity. It was intended to support financial markets, businesses, and state and local governments.
Since the program’s enactment, the Fed’s support of Wall Street has been an embarrassing success, while its Main Street Lending Program and credit extension to state and local governments have been near-total failures.
On April 9, the Fed announced that it was prepared to purchase up to $750 billion in corporate and other financial-market bonds, backed by $75 billion in the CARES Act, leveraged 10 to 1. That so reassured markets that the Fed did not have to actually buy that much, according to a new paper by the National Bureau of Economic Research. So far, Fed bond purchases have been in the tens of billions, but its willingness to buy when necessary has reassured private bondholders and allowed bonds to maintain their value.
But other lending has languished. In April, the Fed and the Treasury also committed $75 billion of the half-trillion dollars in the CARES Act to support Main Street Lending. The Fed does this by purchasing loans made by participating banks.
The program is aimed at companies with from 500 to 15,000 employees, with annual sales of up to $5 billion—the heart of businesses that support regional economies. These businesses employ some 48 million people (smaller businesses were supported by the separate Paycheck Protection Program).
But after four months, just $472 million in Main Street loans have actually been booked, or less than one-tenth of 1 percent of the target. The record for support of state and local government, whose revenues have been clobbered by the corona depression, is equally dismal. Exactly two government bodies have gotten loans—the State of Illinois and the New York Metropolitan Transportation Authority. Of $400 billon available, less than $2 billion has been committed.
What went wrong? For starters, these programs are run jointly by the Fed and the Treasury, and so Treasury has a veto over the terms. Secretary Steve Mnuchin, an alum of Goldman Sachs and several hedge funds, has supported turning the spigots wide open for financial markets.
But in line with Trump’s efforts to starve liberal state and local governments, Mnuchin has imposed tough terms for state and local lending. Interest rates are high, and payback terms are short. So very few even apply. Wall Street is getting far more favorable terms than American state and local governments.
“If the Fed wanted to, it could extend credit to state and local governments with very low rates and ten-year payback terms,” says Bharat Ramamurti, formerly chief banking counsel to Sen. Elizabeth Warren and one of four commissioners on the Oversight Commission for the CARES program. The commission will be holding a hearing Thursday on the failure of the state and local credit program. One goal will be to sort out how much of the blame lies with the Treasury and how much with the Fed.
There are similar problems with overly tough terms when it comes to the Main Street Lending Program. Many of these loans are to businesses at risk of succumbing to the larger economic mess. But the terms of the program require banks to hang on to 5 percent of the credit risk, and many are reluctant to lend.
For that matter, businesses with shaky balance sheets are unwilling or unable to borrow. In its most recent report, the Oversight Commission cited a survey showing that only 3 percent of small and medium-sized businesses are even seeking more loans.
What many of these Main Street businesses need is not more debt, but equity—that is to say, cash. Congress recognized this problem when it created the Paycheck Protection Program for smaller businesses. It offered loans that were forgivable if the business complied with the terms—in other words, cash grants. But the CARES Act does not permit this for the larger businesses that can qualify for the Main Street Lending Program.
A deeper problem is that it’s much easier for the Fed to go into capital markets and buy up bonds than it is for banks to make loans to businesses, which have to be reviewed and processed one at a time. And while the Fed does have emergency powers, it cannot make direct loans, much less grants.
In line with Trump’s efforts to starve liberal state and local governments, Mnuchin has imposed tough terms for state and local lending.
What we really need is a counterpart of two New Deal–era government agencies that did make direct loans and infusions of cash to homeowners and businesses: the Home Owners Loan Corporation and the Reconstruction Finance Corporation. In exchange for government injections of capital, the RFC took seats on corporate boards and even replaced CEOs.
Forgivable loans administered by banks are a more cumbersome and less careful way of accomplishing the same objective. Though tainted by some scandals, the PPP at least did get a lot of money out the door and saved a lot of small businesses from going under. State and local governments, and larger Main Street businesses, need the same help.
Under current law, Main Street loans are not forgivable. But very long payback terms with very low interest rates would be a big help (the Fed’s own interest rates are barely above zero).
The $3 trillion HEROES Act, which passed the House in May and is being blocked by Senate Republicans, does provide $1 trillion in direct grants to state and local governments. It provides only tax credits to local businesses.
As other topics have dominated the headlines, Republicans have largely escaped political responsibility for denying businesses and public bodies this necessary aid. Several states are on the verge of massive service cuts and layoffs.
Under the earlier CARES Act, there are hundreds of billions of dollars approved but unspent. The main culprit is Treasury Secretary Mnuchin and his boss, President Trump. But because the details are blindingly technical, it’s hard for the public to connect the dots between vicious administration policy and needless Main Street suffering.
