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Thread: Reacting to the perception "that the Main Street program’s modest initial activity is evidence of failure," Boston Fed Bank President Eric Rosengren says, "I completely disagree." file:///C:/Users/User/AppData/Local/Temp/20200812-text.pdf
He notes that designing such a program is inherently challenging, owing to "tradeoffs between limiting credit risk, ensuring that operations are safe and secure, reaching scale, and achieving operational efficiency." Doing it in several months was "a significant achievement," and
that "The numbers to date seem to me consistent with what I would characterize as a gradual pace of initial activity that is more recently expanding as participants become familiar with the program’s parameters.
But while designing such a lending program is indeed challenging, the task is hardly one without precedent. As I've reported in the past, the Fed confronted virtually identical challenges when it launched its very similar "Industrial advances" program in June 1934.
That program also provided for Fed loans of up to 5 years maturity, direct or with bank participation, "to provide working capital to businesses...unable to obtain the requisite financial assistance on a reasonable basis from the usual sources."
Like today's Main Street loans the Fed's "Industrial Advances" were "largely high-risk loans made to border-line credit risks which will almost certainly involve difficult collections and abnormal loss charge-offs."
According to Rosengren, In the 6 weeks since the Main Street program was launched on July 6, 87 loan applications, of which 32 have been approved, representing a total loan commitment of under $253 million.
In comparison, between its launch at the start of July 1934 and October 3, 1934 (the earliest report available) the Fed has received 3,533 loan applications, most of which came in during the program's first 5 weeks.
According to James Dolley, "the federal reserve banks were almost swamped with inquiries and ... applications," so that its loan review committees "found it almost impossible to keep up with the volume of work, even with semi-weekly meetings." https://www.jstor.org/stable/1885023?seq=1
"By September," however, "the initial rush was over and by December applications were being received in much smaller and steadier volume."
As of October 3, 1934, the Fed had granted or committed to making 491 loans totaling over $22.8 million; in labor-cost terms that's the equivalent of perhaps $1.4 billion today.
Even despite this relatively substantial uptake, a careful after-the-fact assessment of the Fed's business lending program of the 1930s concluded that it was "not worth the effort." https://www.jstor.org/stable/2975520?seq=1
All of which leads me to conclude that President Rosengren's appraisal of the Main Street Lending program's success is at best highly optimistic. (End.)
