Needed: A Government Lending Program

I am an advocate of limited government intervention even during crises. However, I believe that this Covid-19 crisis is different and that the US Government, through the Federal Reserve and the Treasury Department, should create a credit facility so that US Businesses can borrow at favorable rates in order to tide them through this temporary period of reduced economic activity. To this end, I agree with this editorial in the Wall Street Journal.

We have a Solvency crisis instead of a Liquidity crisis

Paycheck To Paycheck

Just as you read about workers who struggle with their own finances and live paycheck to paycheck, many small businesses live in the short term as well. Think about local restaurants that dip into tonight’s till in order to pay for tomorrow’s food order as well as for the salaries of the people who work at those restaurants. It is not in the best interest of those restaurant owners or workers to go out of business because we all need to stay home to stem the spread of a pandemic. This is not an issue of creative destruction or the evolution of tastes. Instead, much like during World War II, the nation is mobilizing (or de-mobilizing, as the case may be) in order to fight a pandemic. US Businesses and the people who work at those businesses shouldn’t be collateral damage in this war.

Rates are Low

US Treasury rates are sub-1% across the yield curve, and there doesn’t seem to be an end to the demand for US Treasury debt. Per this Wall Street Journal article, in order to create this proposed credit facility, the Federal Reserve would invoke emergency powers under Section 13(3) of the Federal Reserve Act and thereby create a “Government-Backed Credit Facility” that US businesses could access in order to keep their businesses from going under. With rates so low, we should allow US businesses access to Government rates during this time of need. If this Covid-19 crisis is indeed temporary, even 3 to 6 months temporary, it would be better to allow businesses to stay open by borrowing at the Fed window than to allow them to go out of business and then have all of those workers move to the unemployment window.

IMO

The Federal Reserve already used one bullet in its arsenal when it dropped the Fed Funds rate this past weekend by 100 basis points to near zero. It was a “nice to have” but investors were unimpressed and the Dow Jones Industrial Average declined by 3,000 points on Monday 3/16, the first day of the new zero interest rate policy. Investors were unimpressed because the rate drop addressed a potential liquidity crisis, which isn’t really what we have now. Instead, the current crisis is really a solvency crisis – can US businesses, especially those who are not capitalized enough to withstand a crisis (and who is?), make it long enough to see through this pandemic? This proposed Government-Backed Credit Facility would directly address the solvency issue, more than dropping the Fed Funds rate, and more than a fiscal stimulus budget package (although that would be nice, too). Look for something like this to happen in the relatively near future.

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