Fed to states, counties, cities: No free money for you
Meanwhile, taxpayers backstop debt frenzy for corporate sector
The Federal Reserve Bank of Chicago, on LaSalle Street. (Flickr/Ken Lund)
By Ameya Pawar and Ted Cox
It’s time to end the double standard the federal government is applying to coronavirus relief aid for the private and public sectors.
When the depth and reach of the economic collapse stemming from the COVID-19 pandemic first became apparent, the Federal Reserve immediately stepped in to backstop bond funds, hedge funds, and banks with penalty-free no-interest loans. It bought debt as a way to secure big businesses, resulting in a debt frenzy in the corporate sector.
Earlier this month, Apple took advantage by floating $8.5 billion in bonds, this while it had “a massive $190 billion cash hoard as of its first-quarter earnings,” according to MarketWatch.com. Apple thus was “adding its name to the roster of U.S. investment-grade companies borrowing a record amount of debt in the corporate bond market during the pandemic.”
The story added: “The Apple bonds come amid a record deluge of investment-grade supply over the past two months as companies have raced to stockpile cash during the coronavirus pandemic, which has forced stores to close, schools to shutter, and the loss of millions of jobs in the United States.” As of the first week of this month, “a cumulative of $807.1 billion of investment-grade corporate bonds had been issued since Jan. 1, making it the fastest start to a year ever, according to Bank of America Global Research.”
Look, we get it. The easy money is in part floating the stock values of the major corporations that can afford to make those deals, bolstering the stock market against the crash that sent prices plummeting in March. As The American Prospect and The Intercept reported just Wednesday, the stock market has risen 30 percent since the fed made its commitment to easy money, while “49 companies issued corporate debt since March 23, adding up to hundreds of billions they otherwise couldn’t have secured so cheaply — providing a safety net to the investor class and making a mockery of the alleged virtues of free-market capitalism.”
Let’s not forget that the vast majority of U.S. citizens don’t own stocks beyond what they might have invested through a 401k or a pension fund, while a rising stock market isn’t doing anything to help the stores that have closed, the schools that have shuttered, and the millions of workers who’ve lost jobs — 38 million and counting nationwide as of last week’s latest figures released by the U.S. Department of Labor.
That’s where equivalent aid to state and local governments comes in. To its credit, in the midst of the pandemic the Federal Reserve Board did create the Municipal Liquidity Facility, designating that it “will purchase up to $500 billion of short-term notes directly from U.S. states (including the District of Columbia), U.S. counties with a population of at least 500,000 residents, and U.S. cities with a population of at least 250,000 residents.”
But here’s the thing: the fed is also imposing penalties on those loans to state and local governments, ranging from 1.5 percent in basis points for those governments with the very best credit ratings to almost 6 percent for bonds rated at junk level, and even 3.8 percent for the credit level just above junk.
As we reported earlier this month — right about the time the Apple bond deal was being announced — Illinois had to delay $2.2 billion in short- and long-term bond sales when the penalty rate it was being charged suddenly spiked to 4 percent.
What’s the rationale for that double standard? Why is the Federal Reserve offering free money, basically, to corporations, while making money off state and local governments by holding their feet to the fire in the midst of a pandemic that has caused an economic collapse?
If the argument against government is we want to dissuade irresponsible borrowing, we’ve already baked that moral hazard into corporate debt through federal government policy, and taxpayers are the ones footing the bill. So why is it the fed has set up mechanism to profit from states and cities in trouble? And why is even that meager “help” being offered only to counties and cities of a certain size?
Aurora, the state’s second-largest city, doesn’t meet the 250,000 population requirement. Only Cook County and its collar counties make the 500,000 requirement, and while it’s true they’ve suffered most from COVID-19, the entire state has suffered economically from the mitigation efforts and the statewide stay-at-home order.
Gov. Pritzker pointed this out at his daily coronavirus briefing Tuesday, praising the General Assembly for passing a budget for the coming fiscal year and the “decision of the legislature to not institute more cuts.” As Pritzker stated, quite succinctly, state and local governments are facing lost revenue from the pandemic at the same time the services they offer are needed more than ever in the pandemic. With smaller cities and counties not getting help of any sort from the federal relief packages thus far, Pritzker has insisted that it’s up to the state to pass that funding along, simply to provide basic services, to keep police officers, firefighters, and schoolteachers employed.
“We’re going to need help, there’s no doubt about that,” Pritzker added, but unless Congress provides dramatic relief to state and local governments, as proposed by the Democrat-backed HEROES Act pending in the U.S. Senate, it will come at a cost.
That’s typical, and typically short-sighted by the federal government in a time of emergency. The default position of the feds in all crises is to impose austerity just to get afflicted areas back on their feet, to something resembling the previous status quo. As the Economic Policy Institute recently pointed out looking at the last economic collapse with the Great Recession of a decade ago:
Growth in state and local spending was far slower during the recovery following the Great Recession than in any other post–World War II business cycle on record.
This state and local spending austerity dragged heavily on growth during that time. If this spending had instead followed the trajectory it established following the recovery from the similarly steep recession of the early 1980s, pre-recession unemployment rates could have been achieved by early 2013 rather than 2017. In short, this austerity delayed recovery by over four years.
Recent justifications for denying aid to state and local governments sometimes rest on claims that this spending has been profligate in recent years. This is absolutely not so—growth in state and local spending has been historically slow for nearly two decades. Given the importance of what this spending focuses on (education, health care, public order), this decadeslong disinvestment should be reversed, not accelerated due to an unforeseen economic crisis.
If federal aid is passed that is sufficient to close the enormous revenue shortfalls the economic crisis will cause for state and local governments, it will create or save roughly 5–6 million jobs by the end of 2021. Without this aid, we will remain at least that far away from a full economic recovery by then.
The EPI went on to say, outright, “a prolonged depression is guaranteed without significant federal aid to state and local governments,” and it specifically backed the HEROES Act.
If we learned anything at all from the Great Depression and the New Deal, it’s that public spending is what prevents economic depression and deflation. What the federal government should be doing is ending the double standard between the private and public sectors and providing low-interest loans and grants to cities, counties, and states — same as it is to corporate business interests — so they can go big in providing working people relief and funding a recovery, not just propping up stock prices.