A Fed 'bailout' for Main Street? Speed, collateral stand in the way
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[March 23, 2020]
By Howard Schneider
WASHINGTON (Reuters) - U.S. Federal Reserve
and Trump administration officials over the last week have greased
corporate and bank financial markets, freed up half a trillion dollars
for central banks in other countries, and pledged to keep major
industries such as the airlines afloat.
Can they rescue the neighborhood bar?
That has become a central debate as government officials build an
emergency economic plan of unprecedented scale and speed.
Paid sick leave for more workers and broader access to unemployment has
already been approved. Trillion-dollar plus followup proposals include
cash grants for most adults.
What is not clear is how the full faith and credit of the U.S. Treasury,
or the related power of the U.S. central bank's balance sheet, can be
used to fix a key issue -- how to keep millions of small businesses from
"Social distancing" has forced retailers, restaurants and bars to close
their doors, wiping out sales.
A Senate bill proposed by the Republican leadership includes $350
billion in loans for small businesses to cover payroll, rent and some
other expenses for the next four months, and includes loan forgiveness
for the portion covering wages.
Grander proposals would pull in the Fed, a suggestion complicated by the
central bank's need to protect itself against losses. Fed rules say it
may only lend to solvent businesses against adequate collateral,
something many small businesses' lack.
The scale of help needed is potentially massive. Nearly 10 million firms
would be eligible under the Senate bill, which applies to companies with
up to 500 workers, federal data show. They employ more than 100 million
people and burn through $100 billion in weekly wages.
The Fed's involvement is inevitable if the program is to be large
enough, some economists say.
"We are heading to an effective partial shutdown of the U.S. economy
over the period of four to six weeks," that may require as much as $1.5
trillion to help small and medium sized businesses survive, more than
four times what's in the Senate bill for small business loans, said Joe
Brusuelas, chief economist at RSM.
Just as the Great Recession sparked on-the-fly innovation that kept
financial and mortgage markets afloat, the damage hitting "Main Street"
has led to calls for the Fed to become similarly inventive, such as by
buying corporate bonds or more aggressively managing long-term interest
rates that affect home mortgages and other important types of credit.
Speed will matter for a group of companies that often operate with slim
cash buffers, but are also a key source of jobs and important to the
fabric and feel of communities. It is a diverse group, including not
just tens of thousands of restaurants and bars with fewer than five
people on the payroll, but iron foundries and oil and gas companies that
employ several hundred.
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Federal Reserve Board building on Constitution Avenue is pictured in
Washington, U.S., March 19, 2019. REUTERS/Leah Millis -/File Photo
On a conference call earlier this week arranged by the Main Street
Alliance, a lobbying group representing local business, firm owners
worried that programs focused on easy credit, even on liberal terms,
will still leave them behind the curve.
Small firms are "weighing the possibility of business coming back
versus the ability to repay loans. If you don't think you are going
to get a big bounce there is no reason to take on debt," said Liz
Pearce, co-founder of Fresh Chalk, a small business-focused social
networking company in Seattle.
The hesitance to borrow, or even encourage the use of gift
certificates or coupons to sustain cash flow in return for future
goods and services, is based on the assumption that a large chunk of
this year's business is simply gone, said Ricky Klein, co-founder of
Groennfell Meadery in Vermont.
"When we lose a pint sale in a bar, it is never coming back," Klein
The alliance has called for "immediate ... and dramatic cash
assistance," to keep the smallest companies going.
Former Fed chairs Ben Bernanke and Janet Yellen in a joint essay in
the Financial Times last week said the Fed may have to get more
aggressive to aid households and small business, and noted a Bank of
England program that makes loans to commercial banks explicitly so
they can lend to companies at below market rates.
Barclays analysts said last week that the Fed's traditional focus on
ensuring "liquidity" - sustaining enough confidence, cash, and
reasonable pricing in financial markets that deals get done and
credit keeps moving - falls short in a crisis that may require the
government to put more public dollars at risk.
One idea: using banks to organize a "mass government-financed
forbearance on credit cards, mortgages and small business loans"
with any losses ultimately guaranteed by the Treasury.
The Fed in the 2007 to 2009 crisis did lend against ostensibly risky
securities backed by assets such as car loans or mortgages on homes
that had plummeted in value.
In theory the Fed could do even more along those lines. Credit card
issuers accustomed to dealing with small business, for example,
"could say that anybody that has issues associated with coronavirus,
we will lend to you, pool it, give it to the Fed," said Vincent
Reinhart, chief economist at BNY Mellon and a former top Fed
For a central bank, however, the lack of hard assets may stand in
Many small businesses are a "few people working together, operating
on good will," Reinhart said. "How do you put that as collateral?"
(Reporting by Howard Schneider; Editing by Daniel Wallis)
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