Washington’s lifelines
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Trump and lawmakers from both parties are quick to credit themselves with splurging to provide aid to Americans who lost their jobs or were in danger of losing them, as well as most middle- and upper-middle-income workers. And they did.
The $2.2 trillion CARES Act, signed into law on March 27, included stimulus payments, increased unemployment benefits, tax cuts and eviction protections. Combined with an earlier coronavirus aid package that bolstered the food-stamp program, the laws clearly tried to give support to Americans on all economic rungs.
All of that money accrues to the national debt — $2.4 trillion in just a few months across four relief laws — and the interest on that borrowing will have to be paid by generations of future taxpayers. The question for many current taxpayers will be whether they’ve fallen behind, held even or gotten ahead as a result of Washington’s work, particularly as they compare their own finances to those of their neighbors and the mega-rich.
Almost everyone got something, but at very different levels. For the vast majority of Americans — even those with the wherewithal to access the various streams available to them — the money simply doesn’t compare to the trillions of dollars in cash and guarantees supporting corporate titans, including Wall Street banks, and their major shareholders. In April, the Congressional Budget Office and the Joint Committee on Taxation estimated the cost of CARES Act stimulus checks at $293 billion and the enhanced unemployment benefits at $268 billion. The PPP loan fund has given out about $520 billion to date, some of which could be recovered by repayment with 1 percent interest. Taken together, those programs, which have garnered so much attention, account for a little more than $1 trillion so far.
For months, the SBA declined to identify any of the businesses that received loans from its program, which are fully forgiven if the recipient uses 60 percent or more of the funds to cover payroll costs. But in June, under pressure from Congress, interest groups and the news media, the agency released a list of 661,218 businesses and nonprofits that received loans of $150,000 or more.
The SBA didn’t identify the vast majority of loan recipients, and it collected racial or ethnic background information on the owners of only 94,501, or 15 percent, of the 660,000-plus borrowers it did name. But of that set, white-owned firms or nonprofits accounted for 78,782 loans and their Black counterparts received 1,827 loans, or less than two-tenths of 1 percent.
Elsie Harper-Anderson, a professor at Virginia Commonwealth University who is studying the impact of the coronavirus on Black workers and businesses in Virginia, said that for reasons including racism in lending, many Black business owners don’t have the existing relationships with banks that are an important factor in getting PPP loans.
“People don’t even go to banks and apply anymore because historically they have not been able to go down that road,” she said. “African Americans tend to be less likely to go to banks. They start smaller businesses — they start with their own cash, loans from friends and family, credit cards, all those kinds of things.”
Despite the challenge of limited data from the SBA, experts who study the subject say that there are both empirical and anecdotal reasons to believe that less-well-to-do business owners — often Black and brown entrepreneurs — suffered disproportionately and receive less help from the government.
Rob Fairlie, an economics professor at the University of California, Santa Cruz, has compiled data on self-employed business owners from government records in recent months. After a massive drop-off from February to April across racial and ethnic groups — including a loss of 41 percent of Black-owned businesses run by the self-employed from March to April — there’s been a rebound. But the figure for African Americans is still down 19 percent from February, compared to 10 percent apiece for Latino and Asian business owners, and 5 percent for white business owners.
Among immigrants who own businesses — based on the self-employment data — the change is an 18 percent reduction.
“I’m concerned that this will increase wealth inequality as the more-advantaged businesses could take advantage of PPP loans whereas small less-advantaged businesses did not,” Fairlie said.
Dan Eberhart, a Republican donor and the owner of several companies, said that banks — which were tapped by the government to administer lending — were far more likely to tend to financially healthier borrowers, and those who had borrowed from them before, in the early days of the crisis.
“I got several PPP loans and do think the program helped me save jobs,” Eberhart said. “From my vantage point, the process favored medium-sized businesses with an existing lending relationship. If you were a small business or one that had never borrowed money, it was an uphill battle to get your application submitted.”
Efforts to promote PPP lending diversity haven’t been ringing successes. About $16 billion combined — or 3 percent of the total dollars — had gone through Community Development Financial Institutions and Minority Depository Institutions through July 17, according to the Treasury Department.
The early days of the crisis were the most critical time for the businesses with the least money, regardless of the owner’s background, which is why the Senate advised the SBA to tell lenders to prioritize disadvantaged small businesses. But the “sense of the Senate” language in the law wasn’t a requirement, and the agency chose not to lean on banks to give to them first.
At the same time, there was something of a gold rush among well-capitalized investment firms, elite private schools, politicians and celebrities to take advantage of the broad eligibility rules for the program and push payroll costs to taxpayers.
At 1 percent interest, suspended for the first six months, the loans are a great deal for borrowers even if they aren’t forgiven — especially if they know what to do with the money.
A business owner who received a $10 million loan on April 4 could have used that money to meet payroll and then invested the same amount in an exchange-traded fund that tracks the S&P 500 index at the market open on April 6. If they sold the shares at the close on Friday, they would have cleared almost $2.7 million and been able to repay the loan before the interest kicked in. Their earnings would have been enough to cover 13 weeks of $600 unemployment payments for more than 340 people.
There are, of course, hundreds of millions of individual stories of how the government’s actions affected each business and each American, and there are countless federal programs engaged in relief efforts.
A Government Accountability Office report issued July 29 noted that one-third of the federal contract dollars obligated in response to coronavirus through June went to 10 firms. One of them, Parkdale Mills, a privately held first-time contractor in Gastonia, North Carolina, bought out its minority stakeholder for $60 million less than a week after signing a $531.9 million deal to make surgical gowns for the government, according to Securities and Exchange Commission and federal contracting records.
And the SBA’s inspector general reported this week that his office found $250 million in loans and grants related to coronavirus aid from the Economic Injury Disaster Loan (EIDL) program that appear to have been given to ineligible recipients, as well as another $45.6 million in apparently duplicate payments.
At the same time, M.J. Gottlieb, co-founder of Loosid, a virtual platform for people in addiction recovery, said that he had difficulty getting anyone from SBA on the phone to discuss his application for EIDL funds. Loosid was originally envisioned as a way for people in recovery to meet up for sober outings but quickly converted into an online hub, serving the need for social interaction but depriving Gottlieb and his business partner of their revenue plan.
He asked SBA for a $2 million loan — based on a projected loss of $1.6 million to $2.3 million — and was rejected. Instead, he was offered a $2,000 grant.
“If they don’t come around and they put us in the position where we have to close our doors, they will be effectively killing people,” he said in a telephone interview with NBC News.
In many cases, the people who needed money just to keep their businesses afloat, their workers paid or a roof over their heads may have been those with the least ability to access it.
The Federal Reserve, partly reserved
The Federal Reserve began injecting steroids into the stock market on March 15. The central bank’s Federal Open Market Committee announced that it would lower the interest rates banks charge each other for overnight loans — a benchmark for other lending — to near zero and begin buying debt instruments like Treasury bills and other securities.
“The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook,” the Fed said in a statement at the time.
Since then, the Fed has bought about $2.3 trillion in Treasurys and mortgage-backed securities and held that key interest rate in place. The Fed also purchased billions of dollars in corporate debt from household-name companies like AT&T, UnitedHealth Group and Comcast (which is the parent company of NBC News).
Because investors could no longer see a return from putting their money in bonds, they placed more of it in stocks, and as companies found it easier to borrow at newly lower rates, their stocks became more attractive to investors. Ultimately, the free flow of credit, catalyzed by those moves and others, created a lot of incentive for stock-market investment despite the economic downturn.
Some of the central bank’s maneuvers, like lowering the federal funds rate, were unilateral, but many required Congress to step in and give the Fed a license to work with the administration on a set of hybrid programs that use instruments of high finance as levers to lend to banks and other companies.
In the CARES Act, Congress empowered the Treasury Department to spend $454 billion in establishing a series of “facilities,” or programs, through which the Fed would provide exponentially more support to banks and other financial institutions; large, midsize and small businesses; and, indirectly, households. The basic idea is that the Treasury Department secures Fed loans for borrowers by guaranteeing $1 for every $10 in lending. In theory, that creates $4.5 trillion of lending power, but there are two big caveats: The 10-to-1 ratio is not set in the law — it’s really up to Treasury and the Fed how to structure the facilities — and the actual participation in the program hasn’t approached the $454 billion cap on Treasury’s spending yet.
Some of the facilities have been up and running virtually since the law was enacted, others are in their infancy and more could be rolled out. These facilities are each designed a little differently, and some of them are more centered on signaling to markets that a lender of last resort exists or on temporary exchanges of credit — such as repurchase agreements in which banks free up cash by selling securities to the Fed for short periods of time and then buying them back — than long-term lending.
What it all adds up to, according to Aaron Klein, a former Treasury Department economist in the Obama administration and the policy director for the Center on Regulation and Markets at the Brookings Institution, is a lot of money and security for Wall Street banks and major companies at a time of suffering for many households.
“Congress told the Fed to bail out corporate debt, and in doing so the Fed is accelerating the growing gap in wealth inequality as the lucky few who own the vast majority of the stock market continue get even richer, while the rest of the country struggles to make it through a painful recession,” Klein said.
There are indications that Fed facilities have been designed with such strict conditions, including limits on executive compensation, that many businesses will decide against taking the federally backed loans.
That is, the Fed isn’t likely to use all of the authority it has to backstop corporate debt, encourage banks to lend and bolster the stock market — unless there’s a resurgence of panic in the marketplace.
“The tools that the Federal Reserve is using under its … authority are for times of emergency, such as the ones we have been living through,” Fed Chairman Jay Powell said at a recent congressional hearing. “When economic and financial conditions improve, we will put these tools back in the toolbox.”
But just the whisper of Fed readiness — the announcement that a tool is in hand — can send stock indexes soaring.
“It’s more important than ever to the equity market that the credit markets are working,” Russell Chong, co-head of North American equity capital markets at Citigroup, told Barron’s in May.
Some of the benefits of the Fed’s interventions may “trickle through,” according to Mulligan, the former Trump economic adviser. But, he said, there should be no mistaking that the lowering of the federal funds rate is primarily a boon for the nation’s largest banks.
“It shows up in their bottom line pretty clearly,” he said. “It’s just a handful of institutions that get to borrow at that rate — because they get a lower federal funds rate, that might show up somewhat in lower car loan rates, maybe lower mortgage rates, adjustable mortgage rates, but it really is a trickle.”
There is disagreement among economists about the degree to which the rise and fall of the federal funds rate affects consumers — and Fed officials tend to see it as a relatively strong tool for helping household borrowers — but there’s little question that both the immediate intent and effect of lowering it in March was to stabilize financial markets to ensure that the crisis on Main Street didn’t spread to Wall Street. The move didn’t provide stability so much as reverse volatility into an upward trajectory, which paid off handsomely for banks and many investors. That is, if anything, it may have worked better than anticipated.
Gary Gensler, a former chairman of the Commodity Futures Trading Commission and an economics professor at MIT’s Sloan School of Management, said that programs like unemployment insurance will clearly help those in need and that it’s hard to tell how the distribution of PPP will ultimately affect large and small businesses, but that it’s likely that the Fed’s actions mean that the overall federal response will widen the gulf between rich and poor.
“Is this going to accentuate wealth inequality? Probably yes,” he said. “I think it’s largely because of this thing going on between Fed policy and interest rates, flooding the market with liquidity and low interest rates, supporting the stock market, and the stock market tends to be more about holders of wealth than workers.”
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