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A few thoughts on the economic rescue programs. TL;DR; Current programs are likely to benefit large companies (and their employees that aren't laid off), in politically risky ways, and better if flawed options exist for helping more people and keeping the economy going. 1/n
Traditionally, the Fed has not taken on any risk other than short-term "liquidity"risk. It has made secured loans, not unsecured loans. In the financial crisis, its venturing beyond that role generated political blowback, mainly from the right. 2/n
The current programs involve extending risky unsecured credit. The Fed is using Enron-like "special purpose vehicles" to leverage funds from Treasury to expand how much private debt it is extending.
Add Trump's pushback on oversight and political risk is high.
3/n
Add Trump's pushback on oversight and political risk is high.
3/n
Traditionally, too, the Fed has lent only to commercial banks. That's why Goldman (an investment bank but not a commercial bank prior to 2007) became a commercial bank. Again, in 2008, when the Fed lent to AIG and GM, it got political blowback. 4/n
Its current programs involve lending to a range of companies, not just banks.
This is going to generate suspicion and distrust, accusations of favoritism and corruption, and calls to abolish the Fed, even if the program is done with pristine purity.
5/n
This is going to generate suspicion and distrust, accusations of favoritism and corruption, and calls to abolish the Fed, even if the program is done with pristine purity.
5/n
The current programs nominally span a range of sizes of companies: small business to medium sized to very large. However, it's a lot simpler to lend to large companies, for non-corrupt reasons. 6/n
There are fewer of them. They have more employees to focus on getting loan applications or other paperwork done. They have better records. They have better lawyers and financial advisors. They have large financial staffs, used to borrowing in large amounts. 7/n
And, too, they are better networked, have bigger reputations, are more capable of contacting Mnuchin or Powell if some staffer doesn't do what the companies want. 8/n
And they are more likely to provide revolving door rewards to government or Fed employees who treat them well now. 9/n
Small businesses often have few employees, none dedicated to finance, may never have borrowered other than via credit card, lack in-house or external lawyers, and can't afford them anyway. 10/n
The design of a lending program for small businesses has to be a lot more like an entitlement program: simple, easy to use, less flexible. 11/n
Even if perfectly designed by an adequate government bureaucracy, it would take longer to get money to small businesses than to large ones. 12/n
And there is no existing government agency that would be ideal to extend genuine credit (as opposed to just give money away) to small businesses. The SBA is too small; the Fed has never had to deal with many small businesses; the IRS has limited credit capabilities. 13/n
It would be better, I think, to focus on sweeping legislation to provide financial relief in the form of suspending rent/foreclosures, cutting taxes to zero pending the crisis for small businesses, and Medicare for all to relieve small business costs. 14/n
And because unemployment insurance is administered at the state level, its effectiveness varies hugely. Some states have effectively broken down in providing UI checks. 15/n
The Social Security Administration, by contrast, is used to handling massive payments. It is not an ideal agency for this crisis -- it can be slow, it is too attuned to preventing fraud for this moment. But it's national, and has mailing addresses for most everyone. /end
