I will make this short and hopefully very sweet. Treasury Secretary Mnuchin yesterday bestowed a gift on the Fed – and thus on our states, cities and small businesses. He doesn’t seem to have planned the gift as a gift, but it is nevertheless a gift.
What am I talking about? I mean Mr. Mnuchin’s announcement yesterday that the Treasury will not renew the CARES Act programs that the Fed administers for our ailing sub-federal units of government and small businesses – the Municipal Liquidity Facility ( FML) and the MSLP Main Street Loan Program).
These programs, as conducted since April, have operated under the authority of Section 13 (3) of the Fed – informally known as the “emergency” provision of the Federal Reserve Act. Financially, they are structured like a banking operation with the Fed playing the “bank” and the Treasury playing the “capital”. Just as a bank lends a multiple of its own funds, the Fed has been allowed to lend a multiple of a CARES Act loan “invested” in the Fed by the Treasury.
What Mnuchin announced yesterday is that the Treasury will withdraw its investment “in stocks” at the end of December. This has elicited a great deal of consternation from Fed officials themselves, business groups and the commentary more broadly, who rightly view Mnuchin’s announcement as premature, if not politically mean. Because the Covid pandemic that first sparked the CARES Act programs is getting worse – in fact getting worse at its worst.
While the criticism of the Treasury announcement yesterday is appropriate, it is in fact an unnecessary and unnecessary distraction. Why? Because the Fed’s municipal liquidity and Main Street loan programs never needed the CARES Act authorization in the first place, let alone Mnuchin’s approval of specific conditions. And allowing An important role in these programs has made them all useless since their launch last April. Now that Mnuchin is out, then, can the Fed really “do it right” with regard to municipal liquidity and Main Street lending?
Let’s focus on this.
Since April, the Municipal Liquidity Facility has been run as if it were a “bailout” mechanism for reckless “Too Big to Fail” (TBTF) financial institutions, like the 2008-09 programs. But that doesn’t make sense. Our states and cities caused neither the pandemic nor the White House’s incompetence in how reckless banks triggered the bubble that collapsed in 2008. Rather, they are our frontline responders in the event of a crisis. national disaster.
Since the MLF has been administered as a bank bailout fund, with “penalty rate”, “market rate” and “bond rating” requirements, it has been almost useless since its inception. Only the state of Illinois and New York’s Metropolitan Transit Authority (MTA) were desperate enough to take advantage. President Powell and other members of the Fed are of course aware of this – how could they not be? – but Mr. Mnuchin resisted all calls, both from me and others, to make the MLF what it is meant be a municipal, not a TBTF bank, liquidity facility.
A similar tragedy struck the Main Street Lending Program (MSP) thanks to Mnuchin’s involvement. It has been stingy with funds and its primary beneficiaries have not been the country’s most vulnerable small businesses, but rather larger, politically connected companies. In addition, MLF and MSLP were wrongly Unique regional federal reserve banks, one each, rather than by all from our regional federal reserve banks.
The MLF is managed by the Federal Reserve Bank of New York (FRBNY), where I previously served. My former colleagues are some of the smartest and most conscientious public servants I know. But it is absurd to think that a small staff can quickly assess the liquidity needs of Billings, Montana or Homa, Louisiana.
Likewise, the MSLP is run entirely by the Federal Reserve Bank of Boston, whose staff are also incredibly knowledgeable and conscientious, but very small. How then can we expect him to quickly process loan requests from Tonya’s Tractor Repair in Peoria or Harry’s Hardware in Bradenton, Florida?
The answer is that we cannot, and that we have claimed otherwise only because we had struck an unfortunate deal with an openly “ political ” Secretary of the Treasury appointed by Trump. Now that he’s out, we can do these things well.
How do we do it right? It’s much easier than you might think …
First, the Fed is already in a position to run these programs under the authority of Article 14 of the FRA – no CARES laws or treasury “equity investments” are required. The only real restriction imposed by this provision concerns the short-term maturities (six months or less) of some of the paper purchased under it. But we only need top-up funding for sub-federal units of government and small business until a new president and a new Congress take office in two months. And the Fed could in any case “renew” the six-month newspaper “as long as necessary”, channeling “everything it takes” from Mario Draghi, if it took more than two months to put in order in our national house.
Second, distribute the administration of both of these programs on all twelve of our regional federal reserve banks – “Spread the Fed”. This is what federal regional banks are for, after all – that’s why we created a “ Federal Reserve System, ‘not just a’ Federal Reserve Bank, ‘in the first place. So let’s let the Federal Reserve Banks of Chicago, Cleveland and Minneapolis run the MLF and MSLP in the central and upper Midwest. Let the Federal Reserve Banks of Richmond and Atlanta manage the Piedmont Delta and the Deep South. Let Kansas City and St. Louis run the central states, Dallas the southwest
Finally, third, immediately remove all absurd constraints on access to these facilities – restrictions which, again, were all due to Mnuchin, who is now outside. Drop all talk about ‘Penalty Rates’, ‘Market Rates’ and ‘MLF Terms and Conditions Notes’ at once. These are reckless bank bailouts, not first responders to national emergencies. Likewise, lower the artificial size thresholds for cities and other public establishments, instead indexing eligibility to actual per capita needs.
And finally, don’t let the eligibility of small businesses depend on how these businesses are politically connected – a hallmark of the “crony capitalism” of the past four years, but not serious public funding facilities. It will be much easier to do when we have all of our locally responsive federal reserve banks running the MSLP, rather than expecting to Boston to manage it.
So let’s jump on it. Enough of the denunciations of Steve Mnuchin, who was never our friend on these programs in the first place. And enough with the bickering to see if the Treasury can really pull back its bogus investment in “stocks”. Just do what you can and should do, Mr. Powell. Manage municipal liquidity and Main Street loans under your authority under Section 14, through all regional feds, over which a politicized treasury has no say in any way.