Update 485 – Amid COVID Relief Failure,
The Premise and Promise of Repurposing
Now that the election is underway and the hopes for Corona relief are vanishing and COVID cases are spiking, the return on inaction is now reflected in the full retreat of capital markets and a dead-cat bounce, in Wall Street parlance, expected in tomorrow’s GDP numbers.
It’s been seven months since CARES, the last federal assistance bill to pass, and it’s becoming increasingly clear that we will have to wait weeks or months for any additional relief package. By then, needs across the board will be much greater. But what if there were hundreds of billions in CARES funds already approved but yet unused soon to be available for relief? We have a look at an answer. More on Fed facilities and the potential for repurposing below.
In March, Congress approved the CARES Act, the largest rescue package in the nation’s history, which appropriated $2.1 trillion in new spending. Almost a quarter of the CARES funds were earmarked to backstop emergency Federal Reserve programs. But the new Fed facilities’ performances range from tepid to dismal.
The Fed facilities are set to expire before January 2021. Instead of extending what isn’t working, Congress should let the facilities expire, recover the unspent funds, and deploy them to businesses and communities in need of fiscal relief. Below, we examine the facilities best suited for fund recovery and current legislative proposals.
A Sunset on the Horizon
In March, the Fed stood up a series of facilities under its emergency lending powers to bolster its role as a lender of last resort. Such facilities are authorized by Section 13(3) of the Federal Reserve Act as amended by Dodd-Frank — a broad statute that permits the Fed to rescue failing firms and address market-access problems in “unusual and exigent circumstances.” The CARES Act provided $454 billion to backstop these facilities.
The Treasury has been able to leverage the $454 billion into new lending. But it has returned to the Fed only $215 billion to back the facilities, which have lent only $26.5 billion in total. About $259 billion of the appropriated funds are unused, and another $92.5 billion is committed to facilities but not invested. With more than $351 billion still on the table, legislators are questioning whether those funds would be better spent on fiscal relief.
With the Fed’s 13(3) facilities set to expire at year’s end, there is a valuable window of opportunity for lawmakers to recover the unspent funds and deploy them elsewhere. The CARES Act only requires the Fed to consult with the Treasury regarding its decision to extend the big-ticket Main Street Lending Program and Corporate Credit Facilities.
The Facilities to Focus On
In order of greatest treasury investments to least, we briefly examine three dysfunctional facilities which may warrant repurposing and three that do not:
- Corporate Credit Facilities: The Fed’s Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF) buy corporate bonds and loan issuances. The SMCCF is backstopped with only $25 billion, while the unused PMCCF is backstopped with another $50 billion, allowing up to $750 billion in corporate debt purchases. The SMCCF has only purchased $13.1 billion in investment-grade corporate bonds and exchange-traded funds to date.
Despite deploying only 1.7 percent of the two facilities’ resources, the corporate credit facilities have lifted prices and narrowed spreads — perhaps too well. Yields for junk bonds have fallen from a high of 11.4 percent to as low as 3 percent. Through August and September, the SMCCF slowed their purchases in response to market conditions and crowd-out concerns. The Fed may extend the facilities beyond the sunset of December 31, despite corporate debt markets’ rebound and low yields for high-risk bonds. The facilities should be immediately sunsetted and the unnecessary backstop repurposed.
- Main Street Lending Program (MSLP): The Fed’s $600 billion MSLP received one of the larger 13(3) programs, with the Treasury committing $75 billion to backstop it. MSLP was designed to help nonprofits and small-to-midsize companies too large for the PPP and too small for the corporate bond market facilities. But to date, the Treasury has invested only half of the $75 billion commitment into the MSLP. The program has facilitated only $3 billion worth of lending — 0.5 percent of its capacity — since its launch on July 6, an amount that requires only $300 million in capital support.
Criticisms of the MSLP span the ideological spectrum. Even those charged with designing and implementing the program do not foresee productive use by MSLP of more than a fraction of the resources allocated by Congress. Many struggling businesses have been unwilling to take on even low-interest debt, dampening the program’s prospects. Instead, the money could fund fiscal relief programs, such as PPP or a new grant program for mid-sized businesses as suggested by Commissioner Bharat Ramamurti.
- Municipal Lending Facility (MLF): The MLF was designed to purchase newly-issued municipal debt with up to three years of maturity from states, cities, counties, and Revenue Bond issuers. The $500 billion facility has lent only $1.7 billion, a result of restrictive eligibility criteria and punitive rates. Although manifold municipalities are facing deep budget shortfalls, only Illinois and the New York Metropolitan Transportation Authority have tapped the facility.
Proposals to lower the interest rate and expand eligibility like those in the HEROES and the Uplifting Our Local Communities Acts would increase the facility’s usefulness for resolving budget crises. Unlike the MSLP and the corporate credit facilities, the MLF’s $35 billion backstop should be extended past the deadline but only if changes are made. Last week, Secretary Mnuchin announced his opposition to an extension. If Congress fails to act and Mnuchin gets his way, municipal bond yields may increase, and states will be left without a lifeline.
- Other Facilities: Three other facilities are backstopped by Treasury equity investments of $10 billion each: the Commercial Paper Funding Facility (CPFF), Term Asset-Backed Securities Loan Facility (TALF), and Money Market Mutual Fund Liquidity Facility (MMLF). All three of these facilities backstop financial markets, which a withdrawal of Treasury’s equity investments could disrupt.
Repurposing Proposals and Support
Fed Chair Powell has repeatedly broken with precedent to call for additional fiscal stimulus to help the economy recover and avoid “unnecessary hardship.” Secretary Mnuchin has gone further. In addition to his statements on the MLF, Mnuchin stated that he didn’t see a need for keeping the remaining $259 billion and suggested repurposing $200 billion for fiscal relief during a House Financial Services Committee hearing in September.
Back in July, Minority Leader Schumer announced the Economic Justice Act, which would repurpose $200 billion worth of the funds to make long-term investments in communities of color. Another bill, Rep. Blumenauer’s RESTAURANTS Act, would repurpose $100 billion of the $259 billion toward grants for restaurants and bars. The GOP also wants to claw back the funding; Majority Leader McConnell’s Skinny Bill included a provision that would remove all uninvested CARES Act funds on January 19 — a day before the inauguration.
But Democrats in Congress are largely fixed on reforming the programs. HEROES 2.0 expands the maturity of MSLP loans and creates a lower minimum loan amount. But instead of amending unfixable programs at the margins, Congress should repurpose the leftover $259 billion in addition to the $92.5 billion of unused backstops toward much-needed fiscal relief programs.
The next coronavirus relief package provides an avenue for repurposing, but McConnell has proven unwilling to pass another relief package before the election. Should Democrats retake the Senate and Joe Biden win the presidency, Republicans will be even less willing to pass a bill during the lame-duck session. It will be up to a Democratic Senate in the 117th Congress to turn the unspent funds into fiscal relief.