View this email in your browser

Unsanitized: The COVID-19 Report for Sept. 18, 2020

The Fed's Policy Choices and Our Maldistributed Recovery
And a moment of Zen for misuse of research

 

The Federal Reserve Bank in New York City, which is undergoing furloughs
right now due to COVID-related revenue shortfalls. (Mary Altaffer/AP
Photo)

First Response

**** The four-member Congressional Oversight Commission (see Days
Without a Bailout Oversight Chair, below) met yesterday in a hearing
discussing the Municipal Liquidity Facility, a $500 billion program
designed to not give loans to state and local governments. At least
that's how it works in practice; only a handful of such governments
are eligible for the facility, and of those, about 97 percent are
"functionally excluded
"
due to the program terms. Five months after being established, the MLF
has granted two loans.

The Fed knows that state and local government austerity represents one
of the biggest threats to digging out of recession. Mark Zandi of
Moody's predicts

shortfalls of up to $650 billion, and a failure to address this will
lead to 3 million job losses and 3 percentage points off GDP. "It will
hold back the economic recovery if [states and localities] continue to
lay people off, and if they can continue to cut essential services,"
is not something I wrote, but what Jerome Powell, the chairman of the
Fed, said in April
.
The central bank has a mandate to maximize employment. And it wants...
someone else to handle it, despite it being clear to anyone with access
to the internet that nobody else will.

Kent Hiteshew, the Fed official managing the MLF essentially said
yesterday that governments can borrow privately, and their facility is
only a last-resort backstop. Republicans on the commission agreed and
said that the program should be dismantled, as the private market has
been "restored."

Read all of our Unsanitized reports here

Click to Support The American Prospect

**** Bharat Ramamurti, a commissioner on the panel, cited Philip
Morris corporate bonds
that the
Fed has purchased on the secondary market, with an interest rate under 1
percent and payback terms of four and a half years, comparing it to MLF
loan terms, at twice the interest rate and shorter terms, for states
with the exact same credit rating as Philip Morris. Hiteshew replied,
essentially, "not my job." Specifically he said, "You and I both
agree that the serious condition of state and local government balance
sheets needs to be addressed... we believe that monetary policy has
limited capacity to do that."

Hiteshew then made this argument you see sometimes where he says that
the Fed buying loans on the secondary market isn't equivalent to
making loans on the primary market, but of course both credit facilities
were set up under the same terms. This is what I was trying to get at
imperfectly a couple days ago
,
when talking about prices paid for bonds. Prices of bonds tend to go up
as interest rates go down, and I shouldn't have used a par value
comparison. But the price paid by the Fed is a policy choice; when they
have unlimited funds to spend, they have the ability to set a price.
It's the same policy choice they're making by choosing to add a
penalty rate to state and local governments, ensuring that taking a loan
won't be attractive. The interest rates offered to municipalities were
too high, and the Fed dropped them amid an outcry. The payment terms are
too short, and the Fed yesterday admitted the ability to change that
(they're offering longer terms on primary market loans in the Main
Street Lending Program). In fact, they have the choice to go completely
outside the MLF.

As I've stated a number of times
,
under Section 14(2) of the Federal Reserve Act, the Fed could extend
six-month notes to cash-strapped governments and commit to rolling them
over for 20 years or more, becoming what amounts to an operating deficit
for entities that cannot otherwise run one. There's a question as to
whether localities are barred by statute or state constitutions from
borrowing, but nearly all have an exemption over the short-term, which
is what this would be, just extended. To the extent changes are needed,
a signal from the Fed that there would be a good reason to do so would
help.

The signal received is "go talk to Congress." But Congress gave the
authority under the Federal Reserve Act and the CARES Act to fashion a
more creative solution. They're not taking it, and the inequality
shock we're seeing right now is the result. That's to be expected
given the Fed's orientation to serve the powerful. They are making
policy choices that enrich those who have little need to be further
enriched, and other policy choices that stiff the needy. This asset
price inflation is intended to trickle down and support jobs, but
companies taking advantage of it are also engaged in mass layoffs, so
that channel appears broken. Jared Kushner wanted the market to decide

recovery, and Congress took him up on it.

This is and has always been my main point: by relying on the Fed,
we're getting a maldistribution of the benefits of recovery. You'd
have to be willfully blind not to see that. As I've said repeatedly,
that's a failure of Congress, and it's depressing that their
inaction forces us to impotently argue about this. Congress handed over
the largest aspect of its relief package to an organization that has
always catered to financial actors and large corporations over ordinary
people. It gave long-term relief to the wealthy and temporary, expired
relief to everyone else. We're living with the result.

Support Independent, Fact-Checked Journalism

Comic Relief

See also this delightful sequence
between
Ramamurti and Chris Edwards of the Cato Institute, who was there to
claim that state and local governments have no financial problems, and
that boosting them with any financial relief wouldn't benefit the
economy. He got to that last point by asserting that a University of
California professor wrote a paper showing no real benefit for state and
local relief. Ramamurti called the professor, who told him otherwise.
It's the monetary policy equivalent of pulling Marshall McLuhan out
from behind the movie posters in Annie Hall. Give it a watch
.

We Depend on Your Donations

Days Without a Bailout Oversight Chair

17
6.

We Can't Do This Without You

Today I Learned

* One pandemic consequence will be a sharply reduced regional airline
schedule, so companies are pulling their headquarters

out of smaller cities. (Atlanta Journal-Constitution)

* The Navajo Nation is doing a far better job

handling COVID than the federal government. (NPR)

* Moderna's protocols for vaccine development

says they won't even analyze Phase 3 trial data until December. Phase
3 timelines are what they are. (New York Times)

* COVID is now resuming in Europe
;
France's caseloads are higher than the U.S. at the moment. Bad signal
for a fall wave in northern climates. (CNN)

* A federal judicial injunction

against the Postal Service changes that caused the summer slowdown.
(Seattle Times)

* California becomes the latest state to pick up the slack for OSHA's
terrible neglect, creating a state coronavirus safety standard
.
(Los Angeles Times)

* Airline worker rates of infection actually lower than the general
population
,
though they don't sit down next to passengers of course. (Business
Insider)

* Potential overcounting

in continuing unemployment claims. (New York Times)

**Click the social links below to share this newsletter**

 

[link removed]

 

[link removed]

 

[link removed]

 

[link removed]

 

[link removed]

 

[link removed]

YOUR TAX DEDUCTIBLE DONATION SUPPORTS INDEPENDENT JOURNALISM

Copyright (C) 2020 The American Prospect. All rights reserved.
_________________

Sent to [email protected]

Unsubscribe:
[link removed]

The American Prospect, Inc., 1225 I Street NW, Suite 600, Washington, DC xxxxxx, United States