The Fed finds another kitchen sink to throw at us

This morning, Federal Reserve Chairman Jerome Powell will be speaking on the just-unveiled $2.3 trillion plan to get more money flowing throughout our shutdown economy.

The Fed’s dual mandate is stable prices and full employment. This morning we learned that another 6 million people have filed for unemployment insurance last week, which is on top of the 10 million cumulative from the previous two weeks. Small and midsize enterprises account for more than 40% of all economic activity and employment – so going directly to Main Street with a lending facility is every bit as vital as lowering overnight borrowing rates for banks. Arguably, it’s even more directly effective.

Wall Street Journal:

The Fed said it would offer through banks four-year loans in which payments can be deferred for one year to businesses with up to 10,000 employees or revenues of less than $2.5 billion. Loans through this Main Street Lending Program, which will initially fund up to $600 billion in loans, will be subject to restrictions on stock buybacks, dividends and executive compensation. Firms that have received separate forgivable loans for payroll costs from the Small Business Administration will be eligible to seek Main Street loans as well.

The central bank will also be buying corporate credit and backstopping municipal debt markets. Here’s Peter Boockvar:

Today’s bazooka is up to “$2.3 Trillion in loans to support the economy.”

Backed by $75b of equity financing into the Main Street Lending program, the Fed will buy up to $600b in loans. In other words, banks will originate loans of 4 yr term “to companies employing up to 10,000 workers or with revenues of less than $2.5b. Principal and interest payments will be deferred for one year…Banks will retain a 5% share, selling the remaining 95% to the Main Street facility, which will purchase up to $600b of loans. Firms seeking Main Street loans must commit to make reasonable efforts to maintain payroll and retain workers.”

They are also enlarging the size of the Primary and Secondary Market Corporate Credit Facilities which are being used to buy corporate bonds. They will also expand the Term Asset Backed Securities Loan Facility and collateral can now be AAA CMBS and AAA CLO tranches. They calculate this will provide support of up to $850b with credit protection of $85b from the Treasury.

They are establishing a Municipal Liquidity Facility that will directly lend money to state and local municipalities of up to $500b. Treasury will provide equity of $35b to create this special purpose vehicle. This SPV will basically be used to buy muni’s.

Josh here. New York State now has more cases of coronavirus (over 155,000) than any other country in the world besides the US. Our response was too little, too late, and now the government has to step in and save the economy from complete and utter meltdown. 17 million people have lost their jobs in three weeks – that we know of – in part because we didn’t react to the pandemic rapidly enough to do more targeted shutdowns, quarantines, testing and contact tracing. And if the government and central bank don’t act boldly now, then what’s the point of having any government or monetary authority at all?

We can argue about what was fair and what wasn’t later. We can debate who should have gotten what rescue after we’ve stabilized employment and buried our dead. For now, this direct action for small business, medium enterprises and municipal finances is not optional.

My wife asked a very simple question during dinner the other night – who is going to pay for all of these loans? My answer was that either way the government (taxpayers) will be paying. The only question is when they want to pay for it – up front, to save companies and jobs, or down the road, when there are 40 million people unemployed, families destroyed and the whole economy is in tatters. Better to spend up front, with borrowing costs at essentially zero, than spend later when more damage has been done.

This is a war. The citizens are threatened by this war. The government exists to fight and finance wars. The only difference is that we’re fighting this one with medicine and financial liquidity instead of battleships and fighter jets.