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A Fed 'bailout' for Main Street? Speed, collateral stand in the way

[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 failing.

"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 MATTERS

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 said.

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 staffer.

For a central bank, however, the lack of hard assets may stand in the way.

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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