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If Biden does win next week, there is no good reason for Brainard’s reticence.
With any kind of corona relief package off the table until after the election and states and localities bleeding revenues and jobs, it’s a crime that the Federal Reserve is not liberalizing the terms of municipal lending under the existing CARES Act that Congress passed back in March.
That $3 trillion relief package provided the Fed with $500 billion, which can leverage other lending at ratios of 10 to 1, or even more. Most of this money has gone to support Wall Street money markets.
Yet on April 9, the Fed authorized a Municipal Liquidity Facility, in which the Fed puts up $35 billion of equity capital, which in turn supports up to $500 billion in lending to state and local government. This can take the form of purchasing government bonds or notes.
But so far, the Fed has purchased just $1.65 billion in municipal notes. And the terms offered by the Fed are so unattractive that few local or state governments even apply.
As a prospective Treasury secretary, looking to reassure progressives that she is more progressive than her history suggests, it might seem that this is a prime moment for Brainard to go public.
The official Fed story is that cities and states have benefited from the low interest rates that have resulted from the Fed’s other interventions in money markets. But that’s small comfort when your tax collections are down by a third and you have to resort to layoffs and cuts in urgently needed public services.
The two Democrats on the Congressional Oversight Commission that serves as a watchdog on the CARES Act, Bharat Ramamurti of the Roosevelt Institute, former chief banking counsel to Sen. Elizabeth Warren, and Rep. Donna Shalala of Florida, have both pressed the Fed to liberalize its terms.
If the Fed wanted to, it has the authority to provide longer-term loans to states and cities, at close to zero interest rates. This would help bridge the fiscal shortfall until a Biden administration and a Democratic Congress came up with another injection of serious relief, and the economy began to recover and restore normal state and local revenue streams.
But the Fed, which is fine lending vast sums to corporations and banks, and even murky investment funds, never liked the idea of supporting cities and states, even ones with credit ratings better than those of the corporations that the Fed supports.
At the September 17 hearing of the oversight commission, the Fed witness, a Fed bureaucrat named Kent Hiteshew, resisted the idea of more liberal lending terms. Hiteshew’s title is deputy associate director, Division of Financial Stability. The Fed did not send a more senior official. And the Treasury declined to provide a witness altogether.
Caught in the middle is Lael Brainard, currently the only Democrat on the Federal Reserve Board of Governors, and a leading contender to be Joe Biden’s Treasury secretary. Inside the Fed, Brainard is said to have pushed for more liberal lending terms. But though Brainard gives lots of speeches and has sometimes publicly dissented from Fed regulatory rollbacks, she has not spoken out about the Fed’s tightwad terms for state and local lending.
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As a prospective Treasury secretary, looking to reassure progressives that she is more progressive than her history suggests, it might seem that this is a prime moment for Brainard to go public. However, should Biden lose, or not appoint her to the Treasury job, Brainard is stuck at the Fed, where there is great peer pressure not to dissent very much if at all. That may be giving her pause.
If Biden does win next week, there is no good reason for Brainard’s reticence. One bit of leverage is the fact that the current Fed chair, Jay Powell, who was appointed chair by President Trump, would like a President Biden to reappoint him when Powell’s term as chair expires in February 2022.
Given the suffering of states and cities at the hands of Republican legislators, if Powell wants to show his bipartisan spirit, one good place to start would be to break with Fed orthodoxy when it comes to urgently needed aid to local and state government. Once Biden is elected, Brainard should be publicly prodding him.
The Fed was fine with stretching its usual limits when Wall Street was collapsing. There are other streets in America. It’s time for both some institutional creativity and personal courage.
