[Senate Hearing 116-459]
[From the U.S. Government Publishing Office]
______
S. Hrg. 116-459
THE STATUS OF THE FEDERAL RESERVE EMERGENCY LENDING FACILITIES
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
ON
RECEIVING UPDATES ON THE FEDERAL RESERVE 13(3) EMERGENCY LENDING
FACILITIES AND THE STATE OF THE COMMERCIAL REAL ESTATE MARKET
__________
SEPTEMBER 9, 2020
__________
Printed for the use of the Committee on Banking, Housing, and Urban Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
______
U.S. GOVERNMENT PUBLISHING OFFICE
44-818PDF WASHINGTON : 2023
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania JACK REED, Rhode Island
TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska JON TESTER, Montana
TOM COTTON, Arkansas MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
MARTHA McSALLY, Arizona DOUG JONES, Alabama
JERRY MORAN, Kansas TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota KYRSTEN SINEMA, Arizona
Gregg Richard, Staff Director
Laura Swanson, Democratic Staff Director
Catherine Fuchs, Counsel
Brandon Beall, Professional Staff Member
Tanya Otsuka, Democratic Counsel
Corey Frayer, Democratic Professional Staff Member
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
Jim Crowell, Editor
(ii)
C O N T E N T S
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WEDNESDAY, SEPTEMBER 9, 2020
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 37
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Prepared statement....................................... 37
WITNESSES
Hal S. Scott, Emeritus Professor, Harvard Law School, and
President, Committee on Capital Markets Regulation............. 6
Prepared statement........................................... 39
Responses to written questions of:
Senator Cortez Masto..................................... 79
Senator Sinema........................................... 79
Jeffrey D. DeBoer, President and Chief Executive Officer, the
Real Estate Roundtable......................................... 7
Prepared statement........................................... 45
William E. Spriggs, Professor of Economics, Howard University,
and Chief Economist, AFL-CIO................................... 9
Prepared statement........................................... 75
Additional Material Supplied for the Record
Letter submitted by the CATO Institute, Center for Monetary and
Financial Alternatives......................................... 81
Letter submitted by the International Council of Shopping Centers 86
(iii)
THE STATUS OF THE FEDERAL RESERVE EMERGENCY LENDING FACILITIES
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WEDNESDAY, SEPTEMBER 9, 2020
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., via Webex, Hon. Mike Crapo,
Chairman of the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
This hearing is another remote hearing by video, and a few
of the traditional videoconferencing reminders again.
Once you start speaking, there will be a slight delay
before you are displayed on screen. To minimize the background
noise, please click the ``Mute'' button until it is your turn
to speak or ask questions.
If there is any technology issue, we will move to the next
Senator until it is resolved, and I remind all Senators and the
witnesses that the 5-minute clock does still apply.
You should all have one box on your screens labeled
``Clock'' that will show how much time is remaining, and I will
try to remember to gently tap the gavel to remind Senators
about 30 seconds before their time is up.
To simplify the speaking order process, Senator Brown and I
have again agreed to go by seniority for this hearing.
With that, today we welcome to this virtual hearing the
following witnesses: Mr. Hal Scott, president, the Committee on
Capital Markets Regulation; Mr. Jeffrey DeBoer, president and
chief executive officer of the Real Estate Roundtable; and the
Honorable William Spriggs, professor of economics at Howard
University and chief economist of the AFL-CIO.
It has been 5 months since the passage of the Coronavirus
Aid, Relief, and Economic Security Act, or CARES Act, and its
being signed into law.
Title IV of the CARES Act provided a $500 billion infusion
into the Exchange Stabilization Fund in order to support the
Federal Reserve's emergency lending facilities.
This amount has been leveraged to provide trillions of
dollars in liquidity back into the markets, supporting credit
flow and helping to stabilize the economy.
Currently, there remains about $250 billion left from the
CARES Act funding.
Today we will receive testimony from each witness providing
an update on the Federal Reserve 13(3) emergency lending
facilities, including recommendations on how the Main Street
Lending Program and the Municipal Liquidity Facility could be
changed to improve access to and demand for the programs as we
move forward.
We will also hear an update on the state of the commercial
real estate market; why the CRE market lacks access to needed
support, including through Main Street; and recommendations for
options to get support to commercial real estate.
The Federal Reserve established the Main Street Facilities
to support lending to small- and medium-sized businesses and
nonprofit organizations that were in sound financial condition
before COVID-19.
The Main Street Program includes five facilities: the Main
Street New Loan Facility, the Main Street Priority Loan
Facility, the Main Street Expanded Loan Facility, the Nonprofit
Organization New Loan Facility, and the Nonprofit Organization
Expanded Loan Facility.
Treasury's equity investment of $75 billion into the Main
Street Program is estimated to provide up to $600 billion in
credit to eligible businesses.
However, there has been broad concern around the lack of
broad access to the Main Street Program, and so far its uptake
has been slow.
One of the most significant industries to lack access to
Main Street is the commercial real estate market.
On July 31, I sent a letter to Secretary Mnuchin and
Chairman Powell urging them to quickly expand the Main Street
Program by setting up an asset-based lending facility and to
address commercial real estate either through access to the
Main Street Program or in a separate facility.
During this hearing, I look forward to hearing more about
the state of small- and medium-sized businesses in industry
across the United States and their access to financing,
additional ways the facilities could be improved and expanded
to provide access to more industries, and recommendations for
the use of the remaining Title IV funds.
As I noted in the hearing on Title IV implementation this
Committee held on June 2, I am still concerned that
incorporating widespread restrictions in these facilities could
render the facilities ineffective and leave businesses and
their employees without critical resources they desperately
need.
The work to get these facilities up and running has been of
immense importance, and now it must be ensured that they are
structured to achieve the greatest impact for those in need.
I appreciate each one of you joining us today to share your
perspectives on these important issues.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, and thank you to
Professor Scott, Professor Spriggs, and Mr. DeBoer for joining
us.
More than 150 years ago, President Lincoln observed, ``It
has so happened in all ages of the world that some have
labored, and others have, without labor, enjoyed a large
portion of the fruits. This is wrong, and it should not
continue.''
This pandemic is revealing just how true Lincoln's words
are today.
This week we celebrate Labor Day, a day when we honor the
people who make our country work--all workers, whether you
punch a clock or swipe a badge, whether you work for salary or
work for tips, whether you are taking care of an aging parent
or raising children. All workers.
But workers deserve more than empty words in a tweet or in
an email message.
For months we have seen advertisements and PR campaigns
from big corporations proclaiming how dedicated they are to the
essential workers that are keeping our country running. But
statements that are not followed up by increased pay or safer
workplaces ring hollow, whether they are from companies or from
Government officials.
This Labor Day, this country is not living up to its
promise to workers.
Whether it is ending a month ago the $600-a-week
unemployment insurance that kept millions of families afloat,
or just the simple promise that families will not lose their
homes in the middle of a pandemic, under President Trump our
Government has given up on its support of our workers.
We are on the precipice of another Great Depression.
If you have the privilege to work from home and you have
been watching your stock portfolio slowly rebound, and you are
thinking right now, ``This guy is being alarmist,'' I have news
for you: You do not understand the real economy.
No matter how well the stock market is doing, no matter how
high bank profits and corporate profits are, if workers cannot
work--and I say ``cannot work,'' not ``will not work''--because
workers are desperate to get back on the job safely, then our
economy cannot work. The President's failure to get this
pandemic under control is keeping tens of millions of Americans
who want to go to work sitting on the sidelines of our economy.
If people cannot go to work, if they cannot pay their rent
or their mortgage, if they cannot pay their car payment or
credit card bills, the bottom will fall out of this economy.
It has been over 6 months since we passed comprehensive
coronavirus relief for working Americans, as the Chairman said,
and because of the President's failed leadership, things have
only gotten worse. He has allowed the virus to rage out of
control. Nearly 190,000 Americans--190,000 Americans--have died
in less than 6 months. You all know the statistics. We are 4
percent of the world's population. We account for 22 percent of
the world's deaths.
School districts have been forced to make impossible
decisions: reopen and put students and teachers and custodians
and cafeteria workers at risk, or continue to teach remotely,
putting an unbearable load on working parents and widening the
achievement gap. State and local governments try to step in and
help, but their tax revenues are down because taxpayers have
lost jobs, businesses have had to cut back, operate with fewer
customers, or shut their doors. That is only going to mean more
layoffs of good middle-class jobs, extending this cycle of
misery.
After Leader McConnell and President Trump allowed the $600
expanded unemployment benefits to expire and refused to pass
additional stimulus checks and refused to pass housing
assistance and refused to support local communities, the
emergency lending programs we are talking about today are
really the only programs left operating to prop up our economy.
And none, as Mr. Spriggs will point out, none of these Fed
lending programs are actually helping workers.
Dividends are still getting paid; CEOs are still getting
their salaries and bonuses. The stock market continues to get a
lift. So if you make your money from a brokerage statement, the
Government is still helping you. In fact, you are pretty much
the only one the Government is actually helping.
But that help does not down from big banks and corporations
to the people who make their money from a weekly paycheck--the
vast, vast majority of the American people.
It should be obvious to everyone by now that those benefits
to the wealthy never ``trickle down'' to the workers who make
this economy run. They did not with the corporate tax cut 2
years ago; they are not now.
Instead, these programs help corporations, many of which
continue to lay off workers and have cut hazard pay for those
who are still risking their lives on the front lines of this
pandemic, if they even bothered to pay those workers hazard pay
to begin with.
Mr. Chairman, we are going about this backwards.
Every dollar we give to working families goes directly to
supporting the real economy, when those families pay their rent
and their bills, when they buy groceries and school supplies
and spend money at local businesses. In fact, if we put
families and workers first, if the Senate would actually do
that, if the President cared enough to put families and workers
first, we would not have to bail out corporations at all. The
market that so many in this Committee profess to put so much
faith in would take care of that.
Of course, we know our economy will not fully recover while
the virus is still not under control.
The CARES Act that we passed in March was designed to be
temporary relief--to get our workers and their families through
the immediate economic hardships while we marshaled all our
country's vast resources and talent to stop a pandemic.
Clearly, the President failed to do that. Now what we thought
would be a relatively short economic disruption has dragged on
month after month after month, with no end in sight.
We still have no mask mandate; we still have no national
testing strategy; we still have no effective contact tracing.
We are seeing another resurgence across 22 States. And as I
said, 4 percent of the world's population, 22 percent of the
world's deaths.
Imagine, Mr. Chairman, and particularly the Republicans on
this Committee, imagine if the President back in March, instead
of dismissing the virus as ``it will go away,'' had taken this
seriously. Imagine if he had said we should all wear masks.
Imagine if he had modeled good precautions we should take.
Imagine if he had said we are going to mobilize America's
manufacturing talent and make enough tests to test every public
school by the summer. Imagine where we would be as a society
right now.
Instead, the President has simply given up on controlling
this pandemic at all until a vaccine is developed. Given the
scale of his incompetence and his failures thus far, we can
only assume he will fail just as badly at distributing a
vaccine once that day comes if he is still in office.
The economy will not recover until this President and his
Cabinet and his friends in Congress take governing seriously.
Later this month, Mr. Chairman, we will have a hearing with
Secretary Mnuchin and Chairman Powell. Unlike today's hearing,
that one will be conducted in person. That is because the
President has told his top officials they must testify in
person, in his continued attempts to gaslight the American
people about the danger of the virus.
We should be conducting, as you have done, Mr. Chairman,
whenever you can, all hearings remotely, not just to protect
Senators and Administration officials, but to protect the
cafeteria workers and the custodians and the staff at this
Capitol, the police officers, all who are forced to show up and
put themselves at risk. Then they worry with the anxiety when
they return home that they may spread it to their families.
After 6 months of failures, I am honestly surprised, Mr.
Chairman--I have been here a long time, but I am honestly
surprised that the President's friends in Congress continue to
let him get away with it.
Mr. Chairman, we need your help; we need your leadership.
You have done the right thing by conducting our hearings
remotely. We need you to demand that the White House sends the
right message about taking the coronavirus seriously. Tell
Secretary Mnuchin he needs to testify remotely. I have no doubt
that Chair Powell would be happy to do so if you asked.
And, Mr. Chairman, we need your help and we need everyone
on this Committee's help in convincing Leader McConnell to
extend direct support for families while we fight this virus.
The House has passed a bill that would take care of workers and
renters and homeowners and students and veterans and seniors
and local governments. We all know this, shall we say,
``emaciated'' McConnell proposal is not going to help these
families keep food on the table.
When something is not right, we speak up. That is the job
we signed up for. Right now thousands of people are dying every
week in this country, and Republicans are not speaking out.
The best way Congress could celebrate Labor Day is by doing
our job. We need your help to tell President Trump and Leader
McConnell it is time to do their jobs, let us get back to work.
We have wasted far too much time already.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
We will now move to our witness testimony, and we will
begin in the order I introduced you. So we will begin with Mr.
Scott. You may proceed.
STATEMENT OF HAL S. SCOTT, EMERITUS PROFESSOR, HARVARD LAW
SCHOOL, AND PRESIDENT, COMMITTEE ON CAPITAL MARKETS REGULATION
Mr. Scott. Thank you, Chairman Crapo, Ranking Member Brown,
and Members of this Committee, for inviting me to testify
before you. My focus is on the Treasury/Federal Reserve Main
Street Lending Program, and my testimony today regarding Main
Street is based on the September 3 statement of the Committee
on Capital Markets Regulation, CCMR as abbreviated. With
respect to other issues, the testimony is my own and does not
necessarily represent the views of my Committee.
CCMR believes that small- and medium-sized businesses will
need financial support for several years to recover from the
impact of the COVID-19 pandemic. While our economy is
improving, given the depth to which it fell, there is still a
long way to go. Small business revenues continue to be well
below prepandemic levels, and the recovery has stalled since
July. A key part of this financial support should come from the
Main Street Program authorized by the CARES Act.
So far, the three for-profit business facilities of the
Main Street Program, which have been operating for over 2
months, have fallen far short of their desired results.
Secretary Mnuchin has estimated that between $25 and $50
billion in loans will ultimately be issued through Main Street,
significantly below its existing lending capacity of $600
billion and what is actually needed for economic recovery.
CCMR has, therefore, recommended that Main Street be
significantly restructured to take on more credit risk by
providing that the Federal Reserve make 100 percent of each
loan rather than 95 percent as presently provided, leaving
banks and other eligible financial institutions as processors.
If banks take on any loans or any portion of a loan, they will
apply normal credit standards that many needy businesses cannot
meet.
Second, these loans should be at the low market rates,
lower interest rates, and longer maturities, coming close to
equity, without actually requiring capital restructuring.
Congress has already appropriated $454 billion in the CARES
Act to back Fed lending facilities. Depending on how one
counts, $251 billion or $351 billion is used. If you look at
money that the Secretary has said he would commit but has not
committed, there is actually $351 billion available. And much
of this is unused and could be used to provide additional
backing for Main Street.
It is critical that the Fed and Treasury revise and deploy
the Main Street Programs now as the congressional authority for
the Fed to make new Main Street loans likely expires on
December 31st under the CARES Act.
The Main Street loans should be made on a first-come,
first-serve basis, based on available data and objective
criteria, to ensure that the Government is not picking winners
and losers and that the prospective borrowers have a reasonable
chance to survive. And loans should not be available to
businesses that can get market rate funding from their own
banks. The Fed must also--and this is quite important--reach
out to the hardest-hit and underserved communities so that they
can take advantage of the program.
It is indisputable that small- and medium-sized businesses,
the backbone of our economy, have been very hard hit. A V-
shaped recovery, meaning that the economy will within the next
year bounce back to pre-COVID levels, is unlikely. According to
the latest economic projections from the Fed, the economy will
contract by anywhere between 4 percent and 10 percent this
year. Most officials do not expect the economy to recover
completely until 2022.
While the latest unemployment figures have improved, the
level is still very high at 8.4 percent, and as Chairman Powell
observed last week, there are still 11 million fewer Americans
working than there were in February.
CCMR specifically recommends that Congress enact Senator
Crapo's proposed amendment to remove any doubt that Congress'
intent in enacting the CARES Act was for the Treasury to take
credit risk. If such legislative action cannot be achieved, we
would recommend that the Senate Banking Committee clarify
Congress' intent in a bipartisan letter to Secretary Mnuchin.
There is no guarantee that our recommendations will succeed
in saving American small- and medium-sized businesses. But the
current approach has been tried and found wanting; our
recommendations would give many of these businesses a fighting
chance. The time to act is now.
Thank you.
Chairman Crapo. Thank you, Mr. Scott.
STATEMENT OF JEFFREY D. DeBOER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, THE REAL ESTATE ROUNDTABLE
Mr. DeBoer. Good morning, Chairman Crapo, Senator Brown,
and Members of the Committee. I want to start by simply
thanking you, Mr. Chairman, for your reference at the start of
the hearing about the need to address commercial real estate
and the problems that our industry is having on the rest of the
economy.
I also want to thank you, Senator Brown, for your focus on
the need for rental assistance for individuals and families.
That is very, very important.
And, finally, I would like to comment that Senator Warner
and Senator Toomey and other Members of this Committee were
very instrumental in trying to create a very good program, the
Main Street Lending Program.
I am here today on behalf of the Real Estate Roundtable and
the 19 national real estate trade associations that are
referenced in my written testimony.
People out of work and businesses shuttered and denied
income for months have suffered immensely in this pandemic
through no fault or action of their own. Many of these people
in businesses have struggled to pay for food, struggled to pay
for housing, and struggled to pay the rent for their
businesses.
For owners of apartment buildings, retail facilities,
hotels, office buildings, senior housing, and other buildings,
the situation is dramatically affecting their ability to pay
their payroll and causing layoffs of building maintenance and
security personnel for them. It is impacting their ability to
meet their debt service obligations, which increases pressure
on financial institutions, pension fund investors, and others.
And it is pushing property values down to the detriment of
local governments. It is causing much stress in pools for
commercial mortgage-backed securities. It is threatening to
result in countless commercial property foreclosures. The
situation must be addressed.
I want to thank Congress and the Administration for the
quick, deep, bipartisan COVID relief action taken this past
spring. Without that action, the situation for the Nation's
economy would be much worse. But many of those programs, as
well intentioned and desirable as they are, did not reach
beyond a relatively narrow definition of small business. That
role was left to the well-intended, Fed-administered Main
Street Lending Program. Its goal was to provide capital to mid-
sized businesses with COVID-related economic problems that
cannot obtain capital elsewhere.
Unfortunately, as Mr. Scott just mentioned, the Main Street
Program is not lending. The result: Countless mid-sized retail
businesses, restaurants, hotels, commercial multifamily
building owners are moving closer to shutting their doors
forever.
As these Main Street businesses run out of reserves, they
miss their rent, utility, and tax payments. They furlough and
lay off employees. They begin to look to bankruptcy and
abandonment as solutions. The Main Street Lending Program is
simply far too risk averse, as Mr. Scott said, to respond to
the rapidly developing conditions for many Main Street
businesses.
These Main Street businesses need assistance now. They are
risky, but not because their product or their business line is
risky. They are bearing a huge somewhat immeasurable new risk
that is based on governmental policy, the ability to keep
clients, customers, and guests healthy, and, in particular, the
timing of finding a vaccine. These are the businesses that
Congress wanted the Main Street Lending Program to serve. They
cannot get capital elsewhere. They are disproportionately
minority-, women-, and veteran-owned businesses, and they are
increasingly running out of options. Why? Because there is no
incentive for banks under the program to market these loans and
make the loans. In addition, the program's eligibility,
affiliation, and underwriting rules are not designed to meet
the needs of the businesses that increasingly need this
assistance. Both of these problems could be addressed
administratively without additional appropriated funds.
We should move, as was suggested, the loan--100 percent of
the loan instead of 95 percent of the loan should be moved to
the Fed. The banks should continue to service the loan to
maturity, and like a pool servicer, it should be compensated by
the bond holders--in this case, the Treasury Department.
Perhaps regulators should be instructed not to criticize banks
to make Main Street risky loans, as they currently are
criticizing them.
Incentives for banking a loan will not solve the problem,
though. Administrative action is also needed to reform the
mixture of misapplied Small Business Administration lending
eligibility rules that bar assistance, for example, to any
commercial real estate business. We need to deal with
inappropriate leverage limits that hamper the usefulness nearly
to all retail stores and restaurants. And the underwriting
rules that are in place now simply do not work for any asset-
based borrower, whether that is a manufacturer, a restaurant, a
retail, commercial, or multifamily owner. We need incentives,
and we need eligibility rules that make sense.
Congress, though, should take more action as well. We urge
that Congress provide additional rental assistance to
residential and business tenants. We think the Tax Code should
promote healthy workplaces. We want to facilitate debt
workouts. There's going to be a tremendous amount of debt on
all kinds of businesses that will need to be worked out. We
need to provide reasonable liability protection against COVID
lawsuits that are unnecessary in many cases. And we need to
develop a Federal pandemic risk insurance program.
These actions are by no means simple and by no means small.
We understand that. But together they will help America's
families and businesses recover, and they will allow this job
creation to move forward.
Thank you, and I look forward to your questions. Thank you
very much.
Chairman Crapo. Thank you, Mr. DeBoer.
STATEMENT OF WILLIAM E. SPRIGGS, PROFESSOR OF ECONOMICS, HOWARD
UNIVERSITY, AND CHIEF ECONOMIST, AFL-CIO
Mr. Spriggs. [inaudible] and Ranking Member Brown--did I
unmute? I am sorry.
Chairman Crapo. You are on now.
Mr. Spriggs. OK. Thank you. I apologize. Thank you, Chair
Crapo and Ranking Member Brown, for this invitation to give
testimony before your Committee today on the issue of where the
economy stands with the status of the Federal Reserve's
emergency lending facilities. I am happy to offer this
testimony on behalf of the AFL-CIO, America's house of labor,
representing the working people of the United States, and based
on my expertise as a professor in Howard University's
Department of Economics.
We began this year with the world facing a novel virus for
which we lacked adequate cures and that proved more deadly than
most flus we have encountered. The lethal potency of the virus
and its easy spread required a new set of responses. Given the
lack of a cure and its costly nature of care on people and
health systems, the world adopted a policy of social distancing
and isolation to prevent its spread. This policy proved very
effective in reducing deaths, and for the Nations that took
aggressive measures, like New Zealand, proved highly effective
in ending the virus' threat.
But despite the huge economic benefits of these policies--
and they are huge--slowing the economy to carry out social
distancing had huge costs, too. By all measures, the benefits
of saved lives alone far outweighed the cost of slowing the
economy. It is important to note that in the United States
where our implementation of social distancing policies was very
uneven, it is also clear that the uncertainty of COVID itself
slowed economic activity. The United States policy variation
has clearly documented that social distancing policies are not
the driver of the economic slowdown, but the spread of the
disease is the cause of the economic slowdown. The difference
is in the efficacy of the policy in slowing down the virus.
This virus caused a great decline in economic activity, and
the world responded in new and novel ways. Thankfully, the U.S.
Congress took early action to sustain the economy, passing the
Families First and the CARES Acts, and this bought time for
policies to contain the virus to take hold. Unfortunately,
while the economic policies were effective, the policies to
contain the virus in the United States have lagged those of
other countries, so our economy now enters a new phase of high
uncertainty because of COVID without the aid of those earlier
bold actions.
In March, the uncertainty of COVID slowed certain economic
activity in the United States that led to the first month of
job loss in March, and in April brought the most dramatic loss
of jobs in U.S. economic history. In that 1 month, we lost more
than twice the jobs lost over the course of the Great
Recession. While other advanced economies planned for social
distancing by massively subsidizing payroll, America chose to
dump workers into unemployment insurance systems. Rather than
subsidize payroll, we chose to try and subsidize workers within
the unemployment insurance system. To approximate preexisting
payroll, an additional $600 was added to weekly unemployment
benefits. This policy choice might have worked the same as with
other advanced countries if COVID were put under control and
sufficient economic certainty was restored for households to
resume normal consumption.
However, there were many challenges to using the U.S.
unemployment insurance system. It really was not designed for
this. Our Nation's unemployment system laws do not cover the
workers that were most affected. In 2018, only 8 percent of
those in leisure and hospitality received unemployment benefits
if they were unemployed. And at the peak of the Great
Recession, the system only needed to handle 3 million people.
That was in May 2009, but at the end of March, it was receiving
6 million applications weekly and 4 weeks averaged above 3
million for 7 weeks April to May.
Congress also granted the Federal Reserve funds and
unprecedented latitude to devise policies to maintain liquidity
in the capital markets. You have heard two great testimonies
ahead of me on the problems that the U.S. Treasury imposed on
those funds, limiting their access to minority firms and to
make the program unable to absorb the risk that was needed at a
time of high uncertainty. I will not review those comments. I
will add one additional, and that is a concern to broaden the
ability to lend to public entities.
I want to instead concentrate on the problem facing
households, and looking at the problem facing households, we
are in a foot race against people being unable to make the
payments in the real economy that sustain rent, that sustain
investment, that make it possible to pay the loans that are
owed. Please remember it is the real economy that matters. That
foot race that we are in right now, we are behind because of
the lack of support to households, and without that support, we
face calamity.
Chairman Crapo. Thank you, Mr. Spriggs.
I will go with the first question today with you, Mr.
Scott, and my question really relates to the success or lack of
success, in your opinion, of the Main Street Facility and the
other 13(3) facilities in terms of making capital available to
the stressed businesses that need it.
I understand the testimony of Mr. DeBoer and Mr. Spriggs
about the real estate industry and the minority businesses, and
I understand their testimony that those particular sectors have
not been able to benefit from the Main Street Facility or other
Fed facilities. I am also aware of a point of view that the
other Fed facilities that have been established, like the
Primary Market Corporate Credit Facility and the Secondary
Market Corporate Credit Facility and the Term Asset Back
Securities Loan Facility and others have had an impact in terms
of making private sector capital more available to many
businesses.
So the question I have is: Is the issue of access to these
funds a sectoral issue, one related to real estate or minority
businesses or others? Or is there still a broad-based lack of
access to the necessary capital by companies that just cannot
get that credit in the private sector?
Mr. Scott. First, I think for the capital market facilities
that were extended to companies issuing bonds, for instance,
those have been very successful. They have not had to lend very
much money because the fact that they would be prepared to lend
the money actually steadied the markets, so these companies can
get the money in the private sector.
That is not the case for Main Street. Small and medium-
sized businesses do not access capital markets. They get
funding from banks. So there is where the access issue is
important. And as I testified, I think it is not that the Main
Street Facility was designed to exclude certain industries,
although I agree with Jeff that, you know, in certain cases it
might be that the criteria that were established effectively
excluded certain businesses from getting access. But they were
not designed to just support certain sectors of the economy.
They were designed to support the entire economy.
The problem with the facilities, as the Chairman well knows
due to his amendment, is that these facilities were not
designed to take on credit risk for Main Street. And, you know,
that is in two regards. First of all, as I said in my
testimony, if you say the banks have to take 5 percent, they
are going to apply normal credit standards, and needy
businesses are not going to get the money. And, second, the
terms are too difficult, interest maturity, and so forth.
So I do not think that there is a general discrimination
against sectors. I think it is more of a question of the design
of the program, what the criteria are.
Chairman Crapo. All right. Thank you. And I am running out
of time a little bit already, but----
Mr. Scott. I am sorry for that long-winded answer.
Chairman Crapo. No, it was a long question, too. But, Mr.
DeBoer, maybe I would go to you next, and in the minute or so I
have left--minute and a half, maybe, could you just respond?
Both you and Mr. Scott in your description of what needs to be
done had some pretty significant overlap in terms of how we
could improve the Main Street Facility. And rather than focus
on where you may or may not have any disagreement, could you
just again summarize what you think needs to be done in terms
of making the facility more available in your world?
Mr. DeBoer. Thank you very much. First of all, banks are
not incentivized to lend under this program. They have a 5-
percent retention on the loan, and they are underwriting under
traditional--basically under traditional underwriting criteria.
Well, traditional underwriting criteria would say these are
lendee risky loans. They get criticized by regulators for doing
that. They have the risk of the 5 percent loss even though we
know that these are risky loans.
So we share the view that 100 percent of the loan should
move to the SPV, the Fed facility. We share the view that
maturities should be longer, I believe. I think we share the
view that amortization of the loan should be delayed a little
bit longer and occur later on in the life of the loan. And I
believe that we share the view that the underwriting rules, for
example, requirements that tie the loans to EBITDA or that tie
the loans to a certain leverage ratio need to be revisited
because they simply do not respond to these risky businesses.
EBITDA means nothing when you have no income. And so there
should be more traditional lending criteria to accommodate
asset-based borrowers so you have loan-to-value or you have
loan-to-cost or loan-to-receipt, something that is different
than what we have now. So incentivize the banks and broaden the
eligibility.
And if I could have just one more second, in terms of the
eligibility and certain sectors, the Administration and the Fed
lifted the SBA eligibility rules from their traditional SBA
program and suddenly decided that that should be the applicable
eligibility rules for a Main Street Lending Program, which bars
certain companies and businesses; certainly real estate are
barred. And there is no reason for this, and I do not believe
that Congress intended that for this program or, frankly, for
the PPP program where they did the same thing.
Chairman Crapo. All right. Thank you. My time is up. This
is helpful.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman. And, Mr. DeBoer,
thank you for speaking out, twice I think, in your testimony
for emergency rental assistance, and many of us fear a wave of
evictions in the coming weeks because of the expiration of the
unemployment benefit.
Dr. Spriggs, I will start with you. If we continue to
depend on these Federal Reserve emergency facilities rather
than providing direct support to working families, what do you
think happens to the economy over the next several months?
Mr. Spriggs. Well, we are in trouble. We are in a foot race
right now. As Chairman Powell pointed out and the data we got
last Friday pointed out, we are down over 11 million jobs from
our peak. That is worse today. We are starting in a worse
position than the depths of the Great Recession. We are not
creating jobs at a fast enough level to clear that backlog. And
so we see a rise in long-term unemployment; we see a rise in
the job losses that are permanent job losses, in tandem with
what saw during the Great Recession.
So we are in a foot race in our economy because what we are
trying to do is outrun the debt of the household sector, and we
can only do that by putting money into the hands of workers so
they can pay their rents, so that they can support small
businesses, so that the small businesses pay their rents. The
way to help the economy is to help the real economy. We have to
put back into the system the money that we were losing from the
loss in payroll. Other countries did that by maintaining
payroll. We agreed we would do that by maintaining unemployment
insurance. That $600 is necessary to keep that and so that we
can stay in step with other advanced economies. And without
that, we are going to face massive problems for loan holders
when it comes to commercial real estate.
The way to solve it is not to help the banks in the end. It
is to help the real economy on the front side and have workers
have the money to pay the rent. Even with eviction abatement,
you have got to remember that people are still accruing the
debt of owing that rent. So eviction help is necessary to keep
them from being homeless, but we also need help to make sure
that they have the money to pay the rent.
Senator Brown. So to make sure I understand, and if you can
answer this question yes or no, because I have something else I
want to ask you. To avoid another Great Depression, Congress
needs to take action to provide direct help to families,
workers, homeowners, renters--in other words, regular people.
Correct?
Mr. Spriggs. That is correct.
Senator Brown. Dr. Spriggs, after the 2008 crisis, despite
spending trillions of dollars to rescue the economy, as we
know, millions of families lost their homes, banks got larger,
banks made record profits. Why did that happen? How do we
avoid--two questions. Why did that happen a decade ago? And,
second, how do we avoid that from happening during this crisis?
Mr. Spriggs. To concentrate it so much on the last crisis
on financial stability and thinking the Fed can solve all
problems. The Fed can provide liquidity to keep the financial
markets healthy and to make banks healthy. But that ignores the
other part of the national balance sheet. The assets of the
banks being the loans, we protected that. We did not help
households with the liability side. So what we did was we built
a life raft for the banks, and it pulled away, and the rest of
us were sinking in the storm. We must help the household
sector, and we have an opportunity to help the household sector
now, but we will lose that ability if we do not help the
household sector and we are confronted with banks holding bad
loans and facing collapse because they are holding too many bad
loans.
Senator Brown. Let me ask one other question. Thank you,
Mr. Chairman.
Dr. Spriggs, I have sat on the Senate floor and heard my
colleagues talk over and over about--my millionaire colleagues
and billions in the President's Cabinet talk about giving too
much to workers, unemployed workers, this unemployment
insurance is a disincentive to return to work. I think they are
wrong. What do you think? And why?
Mr. Spriggs. Well, during the period that people were
getting it, there were many studies to look at that exact
issue. They found no negative effect. And then we had August
where no one was getting the money, and we had final proof.
There was no disincentive effect because we saw nothing
happening with labor force participation to indicate that the
$600 was keeping people out. What is keeping people out of the
labor force is the availability of jobs at this record level of
unemployment.
Senator Brown. One study, Mr. Chairman, showed that
unemployment insurance kept 12 million people out of poverty,
and I applaud my colleagues in both parties for passing that
$600 a week, which really kept people from being evicted, kept
them in their homes, kept the economy going, kept the banks in
business, helped everybody, and I am just sorry that my
colleagues do not think that is a key part of this recovery and
addressing the bad economy we are living in.
Thank you, Mr. Chairman. Dr. Spriggs, thank you, Mr. DeBoer
and Mr. Scott.
Chairman Crapo. Senator Toomey.
Senator Toomey. Thanks very much, Mr. Chairman. Thanks for
having this hearing, and a special thanks to Professor Scott
for the conversations that we have had and the thoughtful
contributions he has made to the discussions about these
programs.
I want to take a few moments here to suggest some context
about the Main Street Lending Program, Mr. Chairman, and let me
start by saying I think it is still too soon to call this
program a failure, much less citing it as a failure that
justifies then some new big programs. Let me explain why. There
are several reasons.
First, let us remember this is still a relatively recent
program, for better or for worse. I think the first loan was
made in early July, and there is now very recently a big
increase in the pipeline. I am not suggesting that I think the
program is on track to be utilized to the extent that was
contemplated, but there is an acceleration of utilization.
But maybe more importantly, it is entirely possible--and I
am still trying to get the data to determine this, but it is
entirely possible that businesses that were intended to
participate in this are simply accessing credit elsewhere.
According to the NFIB's July 2020 report, they said, and I
quote: ``Historically, loans have never been cheaper.''
In their August report, they say, the NFIB, among their
membership, which is the largest small business organization in
America, probably the world, they say that only 3 percent of
business owners surveyed said that all of their borrowing needs
were not satisfied. That is pretty interesting. And let us
remember, the Fed, we have thought of this as a lender of last
resort, and it is not a failure if it turns out that other
lenders, private lenders, have been stepping in and providing
the credit that has been needed, whether it is banks or BDCs or
other institutions.
I have also heard, at least anecdotally, there are banks
that suggest that they have been able to offer better terms to
borrowers than the Main Street program. Again, if that is what
is happening, that is not necessarily a failure.
I think it is also important to think about where we are
today compared to where we were when the CARES Act was passed.
The CARES Act was meant, in my view, to resolve an immediate
and very, very dangerous and frightening liquidity crunch due
to the economic shock that we were experiencing back in March-
April. It was meant to bridge this liquidity need for a
fundamentally solvent business to get through what we hoped
would be a very short though certainly very severe episode.
We are in a very different point 6 months later.
Unemployment is much lower than it was then. Obviously, we have
got a long way to go, but unemployment was almost 15 percent.
Today it is just over 8 percent. The economy is overperforming
certainly the Fed's expectations and that of most economists.
Labor force participation is up. Wages are rising. Retail sales
have been strong. Housing starts are off the charts. There is a
lot of encouraging data that is happening. And as I say, the
program was designed to provide a short-term liquidity bridge
for a fundamentally solvent business.
Today we are in a different place, and one of the
challenges that I think we have to ask ourselves is: What do we
do about the industries, maybe even sectors, where we probably
have excess capacity? And we do not know for how long we are
going to have it. How long is it going to take before airline
travel resumes where it was in 2019? I do not think any of us
knows for sure, but I do not think it is in the next few weeks.
Likewise, what is the situation of the capacity in the
hotel sector that has historically served business travelers?
What about restaurants?
The Main Street Program was not designed, was not intended
to keep a sector afloat for months or years while we waited for
demand to eventually come back. I think eventually demand will
come back, but if we want to keep alive companies, broadly
entire sectors, where there has been tremendous demand
destruction, then I think we have to ask ourselves whether this
is the appropriate program to do it, and I would suggest it is
not.
I would also point out that it is not reasonable to
evaluate the Main Street Lending Program by the same metrics
that we use for PPP. They are very, very different programs.
One, we handed away money on the condition that you use it to
keep your workforce intact. Of course, people are going to take
up the money for that purpose. That was very successful for
that purpose. The Main Street Lending Program serves a
different purpose.
Now, having said all that, I do think there are some
modifications that we ought to consider. Some have been
addressed already. Professor Scott, for instance, and others
have suggested that maybe the Fed should purchase 100 percent
of the loans. I think that is worth considering, but there is
an obvious challenge if we do that, and that is that the 5-
percent retention that is required on these Main Street loans,
retention by the banks that originate it, are meant to create
an incentive for the banks to do a proper underwriting so that
there is some limit to the amount of risk that is being taken
here, because the idea was never to simply lend money to
fundamentally insolvent businesses but, rather, to lend money
to cash-strapped businesses that are actually solvent.
Some of the things I think we should consider is--and I
think Professor Scott alluded to this--banks may not be the
optimal vehicle for making slightly more higher credit risk
loans. That is not their culture. That is not the regulatory
mandate, even though the returns are outsized because the fees
are so generous. It is the culture and the practice of banks to
take a kind of binary approach to extending credit. And so
maybe we should consider institutions like BDCs that might be
better able to--you know, extend credit more broadly because
they can take into account the higher return.
A second thing I think we should consider is possibly
upward limits on the EBITDA measures, especially in some places
like early stage growth companies. I think the Fed should
consider and I have advocated considering an asset-based
lending program because it has been observed that there are
categories of our economy where asset-based lending is the
norm.
I also think we should ease the affiliation standards.
Remember, the Fed adopted the affiliation standards based
really on the Small Business Administration programs, and it is
not clear to me that that is suitable.
So, Mr. Chairman, I appreciate this conversation. I
appreciate having this hearing. I appreciate the thoughtful
suggestions that are being made. I just wanted to provide that
context, and with that, I will yield back my time.
Chairman Crapo. Thank you, Senator Toomey.
Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman.
First, I have to recognize Professor Scott. Professor Scott was
one of my professors at Harvard Law School, and if occasionally
I say something that is semi-intelligent, he gets the credit.
The rest is all mine. But, professor, thank you for your
wonderful testimony today.
I also want to recognize Jeff DeBoer, who I have had the
privilege to work with for many, many years. Thank you, Jeff.
I have some questions for Dr. Spriggs. Dr. Spriggs, I was
particularly taken by your emphasis on the uncertainty which is
plaguing the economy because of COVID. And one of the most
uncertain aspects that I am hearing about back in Rhode Island
is just the status of jobs. People do not have the jobs, or
people are on furlough, but they do not expect to be called
back. We did have, as Senator Brown pointed out, a very, I
think, appropriate unemployment compensation program. That is
no longer on the books. We have to get it back on the books, in
my view.
But there is something else that seems to be happening,
too, for uncertainty particularly for working people, and that
is the cost of living seems to be going up, including
essentials. CPI has just shown that the price of pantry
essentials, as they describe it, for example, flour has
increased by 4.5 percent; canned vegetables, 6.4 percent; beans
by 7.4 percent. So you are seeing not only the uncertainty of
will I have a job, but also the uncertainty of will I be able
to afford even basic essentials for my home.
So, Dr. Spriggs, does this make another case for a very
aggressive unemployment compensation program?
Mr. Spriggs. Absolutely. It is the uncertainty that workers
are facing that meant even with the $600, there was no
disincentive to take a job. Workers are faced with such
uncertainty around the job market that you cannot refuse a job
offer because it is not clear when the next one would occur,
and as you are pointing out, the workers who are currently
unemployed disproportionately are Black, Latino, Asian
Americans. These are households with no wealth and no
liquidity. The $600 is necessary to reassure them that they
actually can spend because they are looking exactly at the
issues you talked about, which is food security.
So a smaller amount of money is not going to provide them
with that comfort that I can spend now when they are looking
down the road at increased food prices. For households under
stress, while the general CPI, the inflation rate, may not be
rising very much, they are really looking at those food prices.
That is most immediate to them. And so that is why the $600
ends up being necessary. We did not see a downside in terms of
labor force participation. We saw every upside that was
necessary to keep consumption flat. That was a remarkable
achievement, and as Senator Brown pointed out, we are going to
avoid a high level of poverty despite this economic calamity
because of that.
Senator Reed. Let me follow up, too. In terms of
uncertainty, we passed the first bill with a time limit and ran
out, and so if we do that again, I think people are going to be
sitting back saying, you know, my job might not come back
within the 10 months of this legislation, so I am OK, I am a
bettor. So do you think it is important that we put in criteria
so that we do not repeal the unemployment until financial
conditions return, either the unemployment rate comes down to a
certain state, to an acceptable level, something like that?
Mr. Spriggs. Well, we certainly shocked the household
sector with Congress refusing to extend the need, even with a
high employment rate, even with unemployment duration
increasing, even with the shift in jobs from being temporarily
off to permanently off. And so, yes, you need to give the
household sector a sense that Congress gets the message and
understands the plight of the household sector so that they can
return to some sense of normalcy. So hard deadlines that ignore
the state of the economy are going to not--will not provide the
certainty that households need to go back to spending.
Senator Reed. Now, let me shift gears. We are talking about
uncertainty. I know the focal point is on the Federal Reserve's
program, but one other area which the Fed really does not have
the kind of role to play is what the States are doing. We
created a coronavirus relief fund for the States and gave them
money, and that now seems to be in need of replenishment and
more flexibility so they can spend it in different ways.
Do you think that is appropriate, that we should put more
money to the States to--in fact, they might even be more
flexible and more adaptable to dealing with some of these
problems we have talked about, like homelessness and other
things, than the Federal Reserve program that is going to be
using banks to lend to traditional borrowers.
Mr. Spriggs. We have to give money to the States, and that
is not something the Fed can do. As Senator Toomey was pointing
out in his comments to this, we did not envision this would be
a long-term problem. It has now lapsed over into the fiscal
year change for State and local governments. They are going to
implement austerity, and we need the State and local
governments as partners in solving the COVID crisis. We cannot
have them withdraw from the field. We need them to give us safe
schools and safe workplaces to return to. That is at the State
and local level where people are confronting these issues. The
Fed cannot lend them the money. This is against the State
Constitutions. This has to be something that Congress
addresses, and immediately, because we are in the new State and
local government fiscal years.
Senator Reed. Thank you very much, gentlemen, for your
testimony.
Thank you, Mr. Chairman, for your graciousness. Thank you.
Chairman Crapo. Thank you.
Senator Scott? I believe Senator Scott may have had to step
away. And, therefore, we will go to Senator Rounds. Senator?
Senator Rounds. Thank you, Mr. Chairman.
Let me begin with a question for Mr. DeBoer. First of all,
I want to say thank you to everybody just for participating
today. Given the requirements associated with the Fed's Main
Street Lending Facility and the challenges of taking on more
debt, one alternative approach that has been suggested to
assist businesses in need would be to allow Treasury to buy
preferred equity stakes instead. This would be particularly
helpful in sectors like hospitality and tourism that have high
overhead and real estate expenses. It would also provide much-
needed capital without further stressing balance sheets.
I understand that Congressman Van Taylor in the House and
Senator Moran have been working on different but similar
preferred equity approaches.
My question: Could you discuss the advantages and
disadvantages of preferred equity purchases compared to the
Main Street Lending Facility? Mr. DeBoer.
Mr. DeBoer. Thank you, Senator. As a native South Dakotan,
it is great to see you, and best wishes to you.
Let me just say that the preferred equity option comes up
because typically for loans that--hotel loans, restaurant
loans, lodging loans and so forth that are packaged in
commercial mortgage-backed securities, those loans, those
transactions cannot allow additional equity--or additional debt
to be put on them. They can only have equity. And so that is
the advantage of using a preferred equity approach.
The problem, as I see it, is simply whether a business
wants to, in effect, give equity to the U.S. Government in
their business, and I am not sure whether the appetite is
really there. But I will say this, that the focus and the
efforts by Congressman Taylor, by Senator Moran, by you and
others in the Senate to look at this is very, very important.
This problem will not go away. Some businesses have too
much debt on them and cannot take any more. Some businesses do
not have any more collateral or inventory to pledge for more
loans. And as I said, some businesses' loans are tied up in a
package, a pool, which will not allow any more debt.
So we are very open to exploring this with you and other
Senators and Members of Congress. Something has to be done to
assist these businesses.
I would say that I think that Senator Toomey is correct in
saying that a lot of businesses can get traditional financing,
but those who cannot are really out on a limb, and they have
nowhere to go, and those businesses are the ones we just
described--restaurants, retail space, hotels, real estate
companies in certain sense of the word. And so I thank you for
your focus and your question, sir.
Senator Rounds. Thank you. And I have just a real quick
question for Mr. Scott. Just in listening to the discussions on
the PPP program, Main Street businesses larger--you know, those
that were not eligible, my question: Why not take a look at the
possibilities since Republicans and Democrats both agree that
the PPP was successful and it allowed people to stay on
payroll, their benefits continued on and so forth? What is the
possibility that for some of those Main Street businesses that
were restricted away from PPP because of their size, any value
in looking at some sort of a PPP as an alternative for some of
those larger Main Street businesses? And that would not only be
able to take and keep workers on payroll, keep benefits in
place, but may very well be able to allow those other larger
businesses to stay in business and get through the next several
months. Mr. Scott?
Mr. Scott. Yes, Senator, I think the revised PPP or renewed
PPP should work side by side with the better Main Street
Facility. They are different in their terms. PPP is a
forgiveness program, and PPP was designed for really small
businesses. The Main Street Facility can be used by medium-
sized businesses and is a lending facility. And when you look
at the cost of one versus the other, obviously a forgiveness
program is going to be more expensive than a lending program.
We recommend that risk be increased under Main Street. But they
are still loans that are being extended from the Fed to the
private sector, and a lot of these loans will be repaid. Under
a forgiveness program, of course, you know, you are forgiving
the loan.
So, in my view, from the beginning we had both of these
programs working side by side, and we should continue that
approach.
Senator Rounds. Thank you, Mr. Scott.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Menendez.
Senator Menendez. The Bureau of Labor Statistics' last job
report found that State and local governments have already laid
off nearly 1.5 million public workers. If Congress does not act
soon to help State and local governments, they are going to
have to cut life-saving services, lay off or furlough more
teachers, public safety, emergency health personnel, or raise
taxes.
So, Dr. Spriggs, let me ask you, if State and local
governments continue to lay off workers, will that create a
substantial drag on any economic recovery?
Mr. Spriggs. There will be a very substantial drag, and
that is the head wind we face for the final two quarters of
this year, and it is, again, dangerous for an economy. State
and local government helps to support so much economic
activity, and even if they do not cut more people, their cut in
activity will hurt local businesses. But the number you cited
is bigger than all the jobs lost in State and local government
during the entire Great Recession. These jobs are not going to
come back quickly. They are not going to bounce back unless
Congress steps in to help State and local governments.
The lesson learned from the Great Recession unfortunately
at the State and local level is that austerity is the wisest
policy because Congress refuses to bail you out. If we have a
national macroeconomic event, Congress ignores the problems
that State and local governments face. So if you are a Governor
or a mayor, you will cut expenditures, and you will be slow to
reinvest, and we cannot afford that. We need them to continue
investment in K-12 education and higher education and, as we
see, in our public health system. So we need them as active
partners. Slowing them down threatens our economy tremendously.
Senator Menendez. Thank you.
Mr. DeBoer, what would the impact be on the real estate
industry if States, cities, counties had to cut investments in
infrastructure and education, public health, safety, raise
property taxes to continue paying for essential services?
Mr. DeBoer. Thank you, Senator. Well, it would be bad. I
mean, real estate and State governments' infrastructure are all
intertwined. The health of real estate is critical to State and
local governments' health, and the health of State and local
governments are critical to real estate's health. So we are
intertwined. And I also wanted to say because commercial real
estate employs so many people, real estate employs so many
people, it pays so much taxes, in many cases around 70 percent
of local budgets are derived from revenue from commercial
property taxes of transaction fees, as our marketplace
deteriorates and cannot get credit and the tenants and our
business deteriorate and cannot get credit. That will put more
pressure on what you are rightfully flagging for everyone is
already a problem, and it could get worse as tenants are unable
to pay rent, as landlords are unable to make debt service, and
as values drop.
Senator Menendez. And, of course, in the real estate
industry, the quality of life or the work environment is
critically important, and these services go to the very essence
of that in terms of adding value to where real estate property
is located and what they can demand for price. Isn't that fair
to say?
Mr. DeBoer. Absolutely fair to say, and I would add to it,
given the current situation and the world we live in now, how
States are able to help keep their transportation systems clean
and healthy so that workers feel confident going to and from
their place of business and so forth is very, very critical,
and that is an added expense for State and local governments--
as well as businesses, by the way.
Senator Menendez. Dr. Spriggs, let me ask you, many of us
have been disappointed by the ineffectiveness of the Fed's
Municipal Liquidity Facility. It would be a massive policy
failure if we failed to get money into the hands of State and
local governments, as we have just discussed, especially those
who are the very epicenter of fighting the virus, which is
critical.
Currently, loans under the Municipal Liquidity Facility
would have to be paid back within 3 years. Wouldn't you agree
that just like in the Great Recession the fiscal pressures on
States and localities are probably going to still be there
several years beyond that?
Mr. Spriggs. Yes, the maturity on those loans has to be
greater to really provide the smoothing of income that the
State and local governments need. So extending the maturity and
lowering the fees--the Fed is putting too high an interest
payment on State and local governments through that facility.
Senator Menendez. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Scott.
Senator Scott. Thank you, Mr. Chairman, very much, and
thank you to the panel for being with us this morning on a very
important topic.
I will start with Mr. Scott, asking you a couple of
questions. One relates to the CDFIs and the important role that
it plays in underserved communities and low-income communities.
We have all seen the reports around the fact that we saw a 22-
percent drop in businesses from February through April, and
that is a significant drop in businesses. But when you think
about Hispanic-owned businesses, it is 50 percent higher,
nearly. It is around a 32-percent drop; and African-American
businesses, about 100 percent higher, around 41, 42 percent. It
seems to me that it is clear that it is imperative that our
most vulnerable and underserved populations are not left out of
the economic recovery, and it seems to me the CDFIs can play a
significant role in providing that liquidity and access to the
liquidity that so many of these communities businesses
desperately need.
So, Mr. Scott, what are some changes the Fed and Treasury
should consider to better facilitate Main Street Lending
Program's participation by CDFIs that serve these low-income
and underserved communities?
Mr. Scott. Senator, I agree with the thrust of your
question and that we need to increase the role, but this is not
something I have looked into in any detail. I am really unable
to give you a good response.
What I would say is that we need to make funds available by
CDFIs as well as by the Fed. We should not abandon the Fed's
role here. The Fed has tremendous capability. It has got the
backing of the Treasury. It has got the ability to make loans
if the program is correctly designed. The problem up to now is
that it is not designed correctly. We are asking banks to take
credit risk, which they do not want to take, and the terms are
not good enough for the neediest borrowers. They cannot meet
normal credit standards.
Now, this is something the CDFIs could address, but I
think, you know, we should also focus on redesigning the Main
Street Facility as it now exists so the Fed can do more as
well.
Senator Scott. Well, Mr. Scott, you bring up a very
important point perhaps around the redesign of the Main Street
Lending Programs. I would ask a question that when you look at
the response to the last several months, larger firms have had
access to assistance; smaller firms have obviously had the
Paycheck Protection Program, and if there is another bite at
the apple, I think that would be wise. We have been flirting
with the concept of a 20-year 1 percent loan, up to $100
billion in that fund. But what seems to be obvious and missing
is that mid-sized business and the lack of access to capital
that they are experiencing.
How do you think reducing the minimum loan size from the
Main Street Lending Program, from, you know, the $250,000
level, how would that create more access to resources for those
mid-sized businesses? And, relatedly, how might the Fed and
Treasury reconsider the program's administrative fee models to
better incentivize lenders and small service borrowers--
providers?
Mr. Scott. Well, I think decreasing the minimum loan size
would be really essential for the smallest businesses because
their needs are often less.
I think on the medium-sized businesses they would probably
need, you know, at least $250,000. It is not as big a problem.
I think the problem for the mid-sized businesses is the general
terms about how long the maturity is, how long they get to pay
it back, what the interest rates are, et cetera. I think these
are more the problems with the mid-sized, and my committee has
recommended kind of a realignment of those terms to make them
more attractive to mid-sized businesses.
By the way, I think Senator Toomey raised the point that
maybe these mid-sized businesses do not need this facility
because they can go to the private sector. Maybe that is true;
maybe it is not. I doubt it, because I think there is a lot of
need out there for mid-sized businesses that is not being met
by the private sector.
Under the committee's recommendations, we say that no
borrower should be able to borrow from Main Street if they can
get funding in the private sector. So if Senator Toomey is
right, we will be OK.
Senator Scott. Let me use my last 12 seconds, Mr. DeBoer,
to ask you a question that you will not have time to answer,
but I will ask you to answer it quickly, and that has to do
with creating access for our commercial real estate market.
There is no doubt that the leverage limit set forth in the Main
Street Lending Program term sheets will not work for most
commercial real estate companies. How can additional
flexibility help create more resourcing of those commercial
real estate companies and investors?
Mr. DeBoer. I will try to be very quick, Senator. First of
all, because the Treasury and the Administration use the
historic definition of a small business under the SBA loans for
both the PPP and the Main Street Lending Program without any
authorization or instruction from Congress to do so, they
picked up these historic definitions. Those historic
definitions redline out certain business activities, definitely
including renting real estate, developing real estate, leasing
real estate. So point number one, get rid of these
inappropriate eligibility rules for both the PPP and the Main
Street Lending Program. They have no application here. They
should not be allowed.
And point number two is the affiliation rules, and this
really is not a real estate direct concern, but the affiliation
rules which have received so much publicity certainly should
not apply in the case of these mid-sized businesses, 5,000 to
10,000, as Congress has suggested.
And then, finally, you raise the underwriting criteria and,
again, certainly EBITDA has no place in an asset-based lending
program, and it should be set aside.
And, finally, I would say this: If we are asking the Fed to
make loans to businesses that otherwise cannot get financing,
which is what I think we all want, those loans are per se
risky. And when a bank makes a per se risky business under
current and normal operating conditions, regulators criticize
it and mark it down and require more capital. Those things
should be addressed here. We should be encouraging and
incentivizing banks to make these loans where they are not
right now. They are required to retain 5 percent. That is too
much. They do not get paid enough to service the loans. That is
no good. And they are open for criticism when they do make the
per se risky loans that we always want them to make.
I hope that answers it. I am sorry for going long.
Senator Scott. Thank you very much. I think we need more
time, but maybe we will have a second round.
Thank you so much, Mr. Chairman, for your indulgence.
Senator Brown [presiding]. I believe that Senator Crapo
went to vote. Senator Tester is next.
Senator Tester. Thank you, Senator Brown. I appreciate it
very much, and I want to thank the witnesses for being here
today.
I want to refer back very quickly to Senator Reed's
testimony when Senator Reed talked about the increases mainly
in foodstuffs, and coronavirus has pointed out something else.
As we have seen good prices go up in the grocery store, very
little of that money has gone to the farm gate, and it points
out the fact that we have got another problem in this country,
and it is called ``consolidation and processing'' that we need
to get fixed and fixed soon. Otherwise, our food chain for
grocery store items is going to continue to demand that it goes
up.
Look, I have been concerned about the debt for a long, long
time. I have watched this President in good times infuse about
$1 trillion a year in borrowed money into this economy and then
brag about the fact the economy is doing really, really well
when you see that kind of infusion from previous
Administrations simply was not the case. Then, last, we are in
difficult times right now economically and with the pandemic,
and we have to do things, and it is going to involve borrowing
money.
This question is for all the witnesses, and I would ask you
to be as brief as possible. If you were in a position where you
could say I have got a couple two or three programs that need
to be funded absolutely unequivocally to keep our economy on
track, where would you target those resources? And I will start
with you, Dr. Scott.
Mr. Scott. There are two targets here. There is the
stimulus, which I think Dr. Spriggs has talked about, getting
money to individual people.
The second target is helping small business, and that
should be done through two ways, through the PPP program, maybe
redesigned in some way, and through Main Street.
So those are the three programs that I would focus on.
Senator Tester. Thank you very much.
Mr. DeBoer?
Mr. DeBoer. Yes, sir, thank you for that question. I would
first point out that the recommendations that I have made on
the Main Street Lending Program and that I believe Dr. Scott
has made really require no additional funds from the Federal
Government. They are administrative. They could be done
tomorrow by the Treasury and the Fed if they wanted to.
Second, I would reload the PPP to help small businesses,
and, remember, in effect, that is a supplemental unemployment
check, too, because much of that money passes through to
employees.
And, third, I would set up a rental assistance fund for
troubled residents and business tenants so that if they could
demonstrate severe economic hardship, they could tap those
funds and pay their rent. The PPP could then use more of the
money to pay payroll and utilities and taxes, and you would
have the Main Street Program helping mid-sized businesses. And
I think you would have a much better environment if you did
those three things?
Senator Tester. Dr. Spriggs.
Mr. Spriggs. Thank you, Senator. Well, we are at such a bad
point with the disease, I would say we should think about what
other countries did, which is to subsidize payroll directly and
restore certainty to households about what is ahead. And we
need to keep households that have lost jobs whole.
But the number one thing we have to do is fight the virus,
and we need far greater deployment of our resources at fighting
the virus. We need to make sure that State and local
governments have all the resources that they need, and we need
to ramp up the hiring that it takes at the State and local
government level to do tracing, to do testing, to get the tests
in place, all of those things so that we can contain the virus
and have State and local governments provide us with clean,
safe transportation and maintain our transit systems. And as
you rightly pointed out, Senator, we need this because we have
to worry about competitive balance coming out of that. As you
pointed out, we already have a problem with competitive
balance. It is going to be worse coming out of this if we do
not plan ahead on how we are going to maintain it.
Senator Tester. Amen.
A quick question for Jeff DeBoer. Jeff, right now there are
no Federal programs for rental assistance, and I do not believe
there are any Federal programs for folks who own rental
property when those rents do not get paid. Could you just very
briefly talk about the impacts if we do not do anything, when
folks cannot pay their rent, and not only the folks that will
be put out on the street that cannot pay their rent, but the
folks who own the property that is the rental property? Because
a lot of these owners are not rich corporations. They are
families that may own a duplex or a fourplex that have rented
it out for additional income or for retirement income. Could
you talk about that just briefly?
Mr. DeBoer. Sure, Senator. Thank you for the question. I
think it is tremendously misunderstood what rent goes for and
what it is used for, and the rent--what we call the ``rent
obligation chain'' in the economy is extremely important, and
it begins with the renter, the business, or the person being
able to put housing for themselves and their family or to house
their business. They pay the landlord. The landlord then pays
for maintenance workers, for security workers, for other things
to keep the building safe and healthy. It pays for the
utilities. It pays for State and local taxes. It meets its debt
service to the lenders, and the lenders in turn, whether they
are--maybe they are banks, but they might also be pension funds
or what have you, and those pension funds or banks in turn pay
the bond holders or the pensioners a return.
As this rent is not paid, the weakness will continue to
erode the ability of owners to pay their payroll, to pay their
taxes, to pay their debt service. Financial institutions will
weaken. Pensioners will not get the return that they want.
State and local governments will lose tax revenue because
properties will be revalued in this new world that is based on
rent receipts. If you do not receive rent, you do not really
have much of a value.
So this is extremely important with the underlying part of
our economy. I appreciate it very much. And, Senator, I do want
to thank you for cosponsoring the RESTART bill. A number of
Senators are cosponsoring that bill by Senator Young and
Senator Bennet, and that bill would do an awful lot of what you
are talking about as well. For example, the conversation on
CDFI, the RESTART bill directly authorizes the use of CDFI to
move this money through. So I thank you for that, and I thank
you for the question.
Senator Tester. Thanks, Jeff.
Thank you, Mr. Chairman.
Senator Brown. Thank you, Senator Tester.
Senator Cotton is next.
Senator Cotton. Thank you, and, gentlemen, thank you for
appearing before the Committee.
At a time when we still have millions of working-class
Americans who are struggling because of major increases of
unemployment and job insecurity due to the pandemic, Senator
Schumer and Speaker Pelosi are currently demanding that
Congress provide massive tax breaks for the rich. Namely, they
want to repeal the limitations on the deduction for State and
local income taxes. According to one study, 62 percent of the
benefits of repealing that cap would go to the richest 1
percent and 86 percent would go to the richest 5 percent.
Repealing that $10,000 cap on the deduction for State and local
taxes would result in a windfall for the richest 1 percent of
more than $38,000.
Professor Spriggs, given that 98 percent of the benefits
for repealing the cap on State and local income tax deduction
would go to the richest 20 percent of Americans, do you believe
that Congress should include a repeal of that cap in any virus
legislation that might pass?
Mr. Spriggs. Yes, Senator, I think Congress should. Some
things that benefit the rich do not trickle down. This is an
instance where the philosophy of State and local government
comes into play. State and local governments often benefit
those high-income families by not taxing them. The ability of
State and local governments to raise taxes is threatened by
this inability, and removing that lets State and local
governments tax more efficiently. And so it may appear that
they get a benefit, but it is on the other end that the rest of
us benefit from higher revenues and higher investment in State
and local government.
Senator Cotton. How many AFL-CIO members do you think are
affected by the $10,000 cap on State and local government
taxes?
Mr. Spriggs. Well, our largest affiliate is AFSCME, those
State and local government workers who depend on having State
and local governments have adequate revenues to make the
investments that are necessary to sustain our local
governments.
Senator Cotton. But how many----
Mr. Spriggs. They benefit directly because in those States
that have very low tax rates, there are not the resources to
maintain proper public services and end up with lower
investment. So our teachers who are members of the American
Federation of Teachers depend highly on State and local
governments making the proper investments. That takes revenue,
and that means you have to be able to tax people in your
community.
So it removes a Federal tax burden, but it allows State and
local governments to put the tax where it needs to be.
Senator Cotton. How many AFL-CIO members on their own
income tax returns are hurt by the $10,000 cap on the deduction
for State and local taxes in your estimate?
Mr. Spriggs. I apologize. I cannot give you the precise
number, but in New York State, which is our largest AFSCME
affiliate, a large share of them do, in fact, get hit by that
because with overtime there are members of some of the
affiliates who are not able to make the deduction. Some of them
are high-income workers.
Senator Cotton. OK. So your position then is that Congress
should repeal the cap on the deduction for State and local
income taxes which disproportionately benefits the rich in any
virus relief bill so States and municipalities can raise taxes
on their own citizens. Is that correct?
Mr. Spriggs. So that they can have progressive tax regimes,
because, otherwise, it puts more pressure on taxes to be
collected from those who are low-income and middle-income. That
is the problem. So it is a shift to tax incident toward our
members. Our members pay higher taxes because those at the high
end do not pay the taxes that they should at the State and
local level. State and local level taxes tend to be very
regressive. This provision allows for greater progessivity at
the State and local government level.
Senator Cotton. Thank you, Professor. I think that was an
illuminating conversation.
I yield back my time.
Senator Brown. Senator Warner.
Senator Warner. Thank you, Senator Brown, and let me just
quickly add that one of the reasons that I think the State and
local tax deduction issue comes up and is needed is because,
unfortunately, proposals that have come from the White House
and the proposals that have come from my Republican colleagues
have been so skimpy toward giving relief to State and local
governments during the middle of a pandemic. I would simply
point out that while we did give some funds in the first CARES
bill to State and local government, there was, I think, a
completely absurd restriction put on those funds that would not
allow it to be used for lost revenues. We gave billions of
dollars for the airlines for lost revenues. We gave billions of
dollars appropriately to small business for lost revenues. To
somehow say a State and local government could not use the
CARES dollars for lost revenues I think was a policy mistake.
And I think when you see some of the proposals that are coming
forward that also exclude any additional assistance for State
and local government, it is very disappointing.
I have got a couple of questions. Mr. DeBoer, I want to
start with you. I agree with a lot of proposals in the Main
Street fixes that you have put out. As somebody who was very
involved in those negotiations, along with Senator Brown and
others, I was pretty disappointed with the ultimate facility
that it was not as flexible as we approached, and I think it
left firms and workers really unable to take advantage of that
program.
You pointed out that hotels and retail have withstood some
of the largest declines, and that actually then translates into
that if the landlords are not paid, they cannot make their debt
service, that is going to really trickle into the CMBS market,
and we could have a crisis similar to what we had in earlier
decades.
So if you want to spend a little bit of time--and I do want
to get to CDFIs--on some of your proposals around a preferred
equity structure that you suggested, and my understanding is
that preferred equity structure, the ability to invest would
recently be irregardless of what kind of loan portfolio the
developer or real estate entity had. Is that correct?
Mr. DeBoer. Frankly, my proposal--and, by the way, Senator,
earlier I expressed my appreciation for your involvement on the
Main Street Lending Program to begin with. It is a much-needed
thing. There are a variety of proposals on the preferred equity
side of things. I think that my point of view here is that it
should not apply to every potential borrower out there, but
should be targeted to borrowers who have loans that are tied up
in CMBS pools, because it is there that you cannot put
additional debt, the borrower cannot assume additional debt
relative to those loans. That is where the program is needed.
Again, I am not an expert in this area, Senator. I am
sorry, and maybe I could get back to you with more----
Senator Warner. If you could get back, I think, you know,
as we are trying to explore, you know, while we give rental
forbearance, which I think is appropriate at this point, if we
simply pushed the problem up the food chain, you know, we are
going to have to grapple with it at some point.
In my last minute or so, I want to at least get to you, Dr.
Spriggs. I think my friend Senator Tim Scott pointed out the
question earlier. I have been working a lot on a structural
change around investing into CDFIs. This pandemic has
disproportionately hurt Black businesses, Brown businesses. I
have seen as many as 440,000 Black businesses closed their
doors, oftentimes because they were not able to participate in
PPP because they did not have those long-term banking
relationships. And I really want to thank Senator Brown and
Senator Crapo and so many Members on both sides of the aisle on
this Committee for working on the Jobs and Neighborhood
Investment Act, which we have even found some support from the
Administration on. Part of that component--and this is where we
are having some of the biggest rub. There seems to be a lot of
consensus about the direct equity investment, but the ability
to actually use a Fed 13(3) facility. Dr. Spriggs, do you
believe that the Fed can and should, consistent with its
mandate, better target the minority community and through that
CDFIs and MDIs? That is a relatively narrow piece of the
financing pie, but when we are talking about a third of America
being disproportionately hit, it seems to me that would be
appropriate for the Fed. Dr. Spriggs, can you comment on that?
Mr. Spriggs. Yes, and the Fed has started to figure out a
way that it can interface with the CDFIs. The problem is, as
with the banks, it is a cultural problem. The Fed is not used
to dealing with the CDFIs. This is encouraging them to do it,
and I think more encouragement from your office and from the
Senate to have them do that is a good thing. We still have to
address the underlying discrimination that has been revealed in
the banking system. This is a serious problem. There is a Fair
Credit Lending Act, and it needs to be enforced. We need equal
access to capital. These are proper steps in the interim of
getting the banking culture to be correct.
But looking at our recovery, it is going to be vital that
we figure out how do we get capital to the necessary sectors so
we can have a balanced recovery, we can restore competitiveness
in our system. And I think it will be important looking
forward, as we get out of this, to think: How do we do this?
Because if we just flood the capital markets, as we have seen
here, that does not reach the people we need it to reach in
order to get our competitive balance back.
Senator Warner. Well, I want to just say thank you for
that, Dr. Spriggs, and I want to thank all my colleagues on the
Committee on both sides of the aisle who helped work with this.
This would at least increase--it would be short-term relief,
but it would be structural change. It would be north of $100
billion in additional lending capacity.
Thank you, Mr. Chairman.
Chairman Crapo [presiding]. Thank you, Senator Warner, and
I want to thank Senator Brown for covering while I went to
vote. And, Senator Kennedy, you are next.
Senator Kennedy. Mr. Chairman, can you hear me OK?
Chairman Crapo. We hear you, yes.
Senator Kennedy. Mr. Chairman?
Chairman Crapo. Yes. Can you hear us?
Senator Kennedy. I can hear you.
Chairman Crapo. We can hear you. Go ahead.
Senator Kennedy. I have my little ear bud things on.
Gentlemen, I have listened to the testimony with interest.
I gather that all three of our witnesses are suggesting that
Congress provide more relief. In the first four bills, I think
we spent a little over $3 trillion. I voted for those bills.
Did we do the right thing? I think we did, but we will not know
until we have the benefit of hindsight. One thing I think we
all can agree on is that our debt now is staggering at $26
trillion.
Mr. DeBoer, how do you suggest Congress reduce this debt?
Mr. DeBoer. Well, first of all, let me just say that,
again, the administrative changes that we are suggesting for
the Main Street Program will not cost the Federal Government
any more money.
Senator Kennedy. I understand.
Mr. DeBoer. OK. So you start that. Let us make it work.
As far as the deficit and debt going forward, I think this
is an extremely serious problem, and our industry, which is
very interest rate sensitive, is very concerned over time about
the deficit. I believe that----
Senator Kennedy. How do you think we should reduce it?
Mr. DeBoer. Well, right now I do not think now is the time
to reduce it. I think now is the time----
Senator Kennedy. How do you think we should reduce it?
Mr. DeBoer. When the time comes, sir?
Senator Kennedy. Yes.
Mr. DeBoer. When the time comes, I think that revenue
options need to all be on the table, and I think spending
reduction options need to be all on the table. But, again,
right now this economy is teetering on the edge and needs
assistance.
Senator Kennedy. I get it. Let me move to Mr. Scott. What
do you think, Mr. Scott? How do you think we ought to reduce
this debt once the time comes? Spending, I think we have got
that part.
Mr. Scott. Senator, I totally agree with your concern. We
need to reduce debt in the future. But I agree with Mr. DeBoer
that now is not the time to do it. How we do it in the future
really depends on the situation. Hopefully, you know, when our
economy does recover in the future--and I think it is important
that we work now to make it recover--revenues will increase,
tax revenues will increase, and that will have a major impact
on the reduction of the deficit.
Senator Kennedy. How much more do you think we can borrow
until we get into dangerous territory?
Mr. Scott. You know, that is a very hard question. I think
usually the dangerous territory is inflation, Senator. And, you
know, we are living in a very anti-inflationary environment and
have been so for some time. The debt service cost today is
obviously much less than it would be if we had more inflation.
So we need to keep our eye on that issue.
Senator Kennedy. Let me stop you, Mr. Scott. Here is what I
am trying to get to. You are all very accomplished
professionals, but I am looking for your expertise. I get the
idea that by raising revenue or lowering costs, it takes care
of the deficit. I get that part. How do we do that? We get
advice every day to spend more money. The obvious question is--
and I am not saying we should not. But how much more? At what
point do we get in dangerous territory? I understand the
Phillips curve may be losing credibility, but, I mean, at what
point do you think if we spend this money, inflation will come
back? At what point, if we keep borrowing money, will we
undermine the sanctity of the dollar? That is what I am looking
for as opposed to just, you know, general concepts.
How about you, Professor? How do you think we ought to pay
this money back?
Mr. Spriggs. Is that directed to me, Senator?
Senator Kennedy. Yes, sir, Professor. I am sorry.
Mr. Spriggs. Well, this is a war. We are in a war with the
virus. The last time we had debts at this level was when we
were in World War II. And in a crisis setting, we do not want
to create the uncertainty that we lack seriousness in winning
the war. So we do not want people to think that we are going to
back away from getting the virus under control, and I think
that premature discussions make people believe we do not want
to win.
Senator Kennedy. Professor, I get all that. How do you
think we ought to pay this money back?
Mr. Spriggs. We paid down the debt of World War II--and we
are getting close to the equivalent to that--by ensuring that
we had rising wages, rising productivity, but most importantly,
rising wages, and then as Mr. Scott said, we had increased
revenues because we had broad-based, broadly shared economic
recovery. And we had much different tax rates. We had tax rates
that had much higher levels at the top. That is how we paid
down the debt of World War II, and we have to be thinking about
an economy that can generate that kind of broad income growth
as we saw after World War II. So we have to institute those
institutions that ensure that wages of workers are rising with
productivity. We have to increase the minimum wage. We have to
give workers back the power to organize. We have to put those
things that were in place in the 1950s so that we can see
incomes rise dramatically.
Senator Kennedy. Right. OK, thanks.
Chairman Crapo. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. And thanks to
all the witnesses.
Let me start with Dr. Spriggs. We know that there has been
a lot of discussion about putting in place eviction
moratoriums, both at the State level and the national level. Of
course, the House HEROES Act has an evictions moratorium. The
Trump administration has attempted to put in place some form of
a moratorium, and I do not think any of us want to see tenants
evicted at any time, but during this pandemic it would be
especially dangerous.
However, I think many of you have testified to the fact
that that simply kicks the can down the road. In the end,
tenants are still going to have to make their rent obligations.
They will have to face a balloon payment at the end, which, you
know, given the current trajectory, people are not going to be
able to afford, which is why the Ranking Member Senator Brown
and myself and others put in legislation for emergency rental
assistance. The House HEROES Act also has the rental assistance
provision.
Dr. Spriggs, can you talk a little bit about, you know, the
fact that an eviction moratorium without that additional rental
assistance help simply puts tenants in a untenable position at
the end of the road and immediately, as others have said,
including Mr. DeBoer, puts the landlords who have their own
debts to pay in a difficult position? Can you talk to that?
Mr. Spriggs. Yes, Senator, and exactly the point that Mr.
DeBoer has been raising. We stem off a financial crisis by
making sure that people are making the payments they are
supposed to make and help out the balance sheet in that way.
And as you said, an eviction moratorium is good because we do
not want homelessness, but we need the support for people to
pay the rent. We need landlords to get their money. We need
shopkeepers to have money so they can pay their rents. And this
is the important thing for us to get ahead of the game rather
than wait for foreclosures to take place and banks to be in
trouble.
So this is a foot race, and we are losing the foot race
because the debts are mounting and we are not letting
individuals get ahead of the race on that debt level. That is
what has to take place. And without that, we are going to get
to January, and we will find banks having problems because the
landlords have problems and the loans that the landlords are
paying will be in default.
Senator Van Hollen. Right. Mr. DeBoer, can you comment
quickly? There is a vote on. I am going to have to run. But
this seems to be an area of common ground, and I wish there was
broader recognition that getting funds into the hands of
tenants, you know, to pay their landlords on the residential
side but also, as you point out, on the commercial side, is
something that would be very important at this moment.
Mr. DeBoer. Yes, and it is only going to get worse. The
Multi-Family Housing Council has their numbers out on rent
payments for this month. They have dropped another 5 percent,
and that, of course, is connected with the burning off of
Federal assistance. So that problem is only going to get worse,
and you correctly point out that the moratorium does not solve
the problem. It creates a bigger problem once the moratorium is
lifted without rental assistance.
So I very much favor rental assistance, and I think these
moratoriums, to the extent that they are done--and some have
been overly broad. To the extent that they are done, they
should only apply to residents who have some economic hardship
due to COVID. They should not be blanket moratoriums on
eviction. So thank you for that.
And I would also add, I did not mean to speak over Senator
Kennedy. That was rude. And I just want to--I was trying to
get----
Senator Van Hollen. I am going to, unfortunately, run and
vote now, but I want to thank all of you. We have some common
ground on rental assistance. Take care.
Chairman Crapo. Thank you.
Senator Cortez Masto.
Senator Cortez Masto. Thank you. Gentlemen, thank you. This
has been a great conversation.
Dr. Spriggs, let me start with you. In your testimony, you
noted that the greatest job losses in April, almost 8 million,
were in the leisure and hospitality industry, obviously Nevada
being hardest hit and a major concern of ours as well. So let
me ask you this: What policy mechanisms and tools can Congress
prescribe for a swift recovery for those industries and workers
who are hardest hit?
Senator Brown. Senator Cortez Masto is going in and out.
Mr. Spriggs. The first thing we have to do is get very
serious about fighting the virus so that people can feel
comfortable in returning to normal economic activity. That is
number one. And all efforts have to be directed at giving us an
assurance that we are in a serious fight to get the virus under
control so we can have safe travel and feel confident that we
can stay safely in hotels and businesses feel comfortable with
having their representatives out on the road without returning
and infecting their workforce. So that is number one.
We have to maintain the incomes of workers now so that when
we do have that relief, people are not heavily indebted and
trying to balance their household sheets, and that will delay
their ability to return to travel. And Congress is going to
have to pay great attention as we come out of this to
competitiveness balance. We need a vital transit system. We
need to have airlines back functioning. We have to have tourism
working. That is one of our greatest sources of trade balance,
is through our tourism, through foreign students who come to
the United States. And we have to think through how are we
going to restore competitiveness balance as we come out of
this. Americans do not have paid leave. The rest of the world,
August is vacation month. It is not in the United States. We
have to give serious consideration to how are we going to do
this with a workforce that does not get leave.
There are a number of steps that we need to start
considering now so that we are in agreement as we come out of
this to restore balance to these industries.
Senator Cortez Masto. Dr. Spriggs, thank you. And thank you
all. I appreciate your comments to Senator Tester's question
about what we need to do, because it goes back to what you just
said, Dr. Spriggs, the balance. We have got to look to assure
that individuals are receiving relief, businesses are receiving
relief, everybody should be receiving relief right now, and
nobody should be left behind. And that is why I appreciate this
conversation because I think we also--part of this is how we
address the concerns for some of our mid-sized business, large
businesses, and our smaller businesses as well, because at the
end of the day you need the businesses to employ the workers,
and you need the workers for the businesses. They go hand in
hand.
So, Mr. DeBoer--and thank you for your conversation as
well--you made the comment that Main Street Lending
Facilities--we do not need to invest any more money or inject
any more money into it. What we need is structural change. And
I think I have heard that consistently from all of you. But let
me ask you this--and I agree with you. I think there needs to
be structural change. Would you support, though, clawing back
any of the unused money in the Main Street Lending Facilities?
Or do you think it should still be there to be used as part of
this restructuring?
Mr. DeBoer. Frankly, I think it should be given an
opportunity to work the way that Congress wanted it to work.
And you have given the money. It has been hamstrung. You should
take off those restrictions and let it work, because these
businesses, whether you claw back or not, these businesses need
assistance, and this is the only program geared to provide
them.
So I would favor keeping the program. I would make it work,
though. I would use that money.
Senator Cortez Masto. So if we were to put a bill on the
floor of the Senate this week that actually says that that
money that is unused should be clawed back beginning next year,
what kind of signal is that sending to businesses in general
about where we stand or what we are thinking here in Congress?
Mr. DeBoer. Well, I think the signal is many signals. One
of them is that there is not the will to force the regulators
to make the program work the way that you intended it to work,
and I think that is a bad signal. But, again, if you could only
do some things, you have got to do what you can get done. I
also think that people understand that this bill is a part of
the legislative process, and that as it moves along, hopefully,
you know, the PPP can be recapitalized and this money can stay
at Main Street. So I am not sure that this one vote or bill on
the floor is the end of the world.
I would also say it is a pleasure to be here with Dr.
Spriggs. Frequently, business and employees and workers are
viewed by the press and others as being in conflict. We are not
in conflict. We work together with our workers, with our
employees, and it is great to have the points of view
articulated by Mr. Spriggs here today. Thank you.
Senator Cortez Masto. Well, let me just say this: From the
conversation that we had today, I do not think any of you are
in disagreement. I think the goal here is everybody is in
agreement that there needs to be another comprehensive package.
We all have to be thinking about the relief in a comprehensive
manner here. Nobody should be picking and choosing winners and
losers.
Mr. DeBoer. By the way, we have talked a lot about
opportunities, and all of us, I think have opened our eyes
wider to the lack of opportunities that certain parts of our
economy and country have, and it is worth noting that since the
COVID crisis started, 5 percent of businesses owned by White
business owners have failed while 19 percent of businesses
owned by Black owners have failed. That is not right. And many
of those businesses are these Main Street businesses that
currently cannot get this access to financing, and that is just
another reason why I would put that money to work downtown and
not let it sit idly in a vault somewhere.
Senator Cortez Masto. Thank you.
Chairman Crapo. Thank you.
Senator Jones.
Senator Jones. Thank you, Mr. Chairman. Thank you to all
our witnesses. I really appreciate it.
Mr. DeBoer, I am just going to kind of follow up on that
last comment. First of all, let me thank you. You and the
realtors have been very helpful with my staff and offices on a
number of things that we have been successful on and others
that we are thinking about, so thank you personally for the
work that we have done together.
But I would like to follow up on that question for you and
the other panelists to weigh in, and that is access to capital.
We have seen that early on minority businesses had trouble
accessing the PPP program. I have not seen the latest
statistics on that, but we had to make some carveouts to help
with that. We have seen the businesses fail. As you mentioned,
19 percent of Black-owned businesses have failed compared to
only 5 percent of their White counterparts.
I understand taking some of the money that we have, that is
left over, to maybe help infuse and actually stimulate those
businesses. But this is a long-term problem. This is not
something that the pandemic caused. You know, minority
businesses and the struggles that they have are really--they
have been ongoing for a long time, and the pandemic just put a
spotlight on those.
So how best going forward can we ensure that minority
businesses have access to capital? How can we ensure that they
are as structurally strong as their White counterparts? And I
will start with you, Mr. DeBoer, since you just mentioned it,
but I would like to get the others to weigh in as well on this
question. I think it is incredibly important for America.
Mr. DeBoer. Senator, it is incredibly important, and I will
be very brief. It is complicated, and it is a long-term answer
to how we address the problem that you have described. But one
thing that you might consider--and I again do not want to say
it is the greatest--well, let me just put it this way: Senator
Menendez has a bill that would encourage businesses to
provide--they would be measured more by the types of
opportunities and investments that they make into minority-,
women-, and veteran-owned businesses. And having a benchmark, a
structure, a metric that people and businesses could be
measured against in that bill--and the bill also passed the
House. I believe Congressman Meeks put a bipartisan bill over
there. I think having something that businesses would be
measured on in their ESG statements or in their filings to the
SEC would be very, very helpful in this regard. And I want to
tell you that my experience talking to CEOs around the country
in a variety of businesses, everyone seems aware and intent and
focused on doing what they can do to address this problem. We
will see, but they certainly seem to be willing right now.
Mr. Scott. So, Senator, I think it is imperative that if we
have Government programs to support our economy that they reach
minority businesses or minority people. Many of the people are
unaware of these programs, so we have to do a much better job
of reaching out. And our committee has advocated that any
revised Main Street Program do so, and I would generalize that
point to all Government programs that we have. Part of the
problem is that the Government is not reaching out sufficiently
to make these programs known in many of our communities. So
that is one practical step I think we could take.
Senator Jones. Great. Dr. Spriggs?
Mr. Spriggs. Thank you so much for the question, Senator,
and, yes, this has now raised to you see a consensus among a
panel of business and labor economists on this point. The
Government can play its own role through its contracting. The
Government needs to debundle as many contracts as possible so
that it is the Government doing direct contracting rather than
having subcontracts. This will ensure that the Government knows
that it is maintaining competitive balance in our economy and
gives greater access to minority-owned firms because they get
to deal directly with the Government rather than having to deal
with these bundled contracts. Business-to-business contracting
is the greatest level of discrimination that takes place in our
economy, and this has revealed the discrimination within the
banking system.
The Federal Reserve has to be held far more accountable for
its responsibility in ensuring there is not discrimination in
lending, and what this has shown is that banks do discriminate,
and that has to stop. And the Fed has to be questioned
repeatedly about what steps it is taking to monitor that. We
have an eye on mortgage lending through the Federal home
mortgage data system. We need a system similar for business
lending so that we make sure that there is reporting and
accountability on that level, and when Congress hears from the
Fed Chair, to make sure that is part of what he responds to, is
how inclusive is our banking system in making these loans
available, broadly speaking. And we need business to step
forward and looking at its supply chains. There is a National
Minority Supplier Development Council, and we need businesses
to be participating in it and holding themselves accountable,
as we hold the Government accountable through changing its
contracting or making sure that they are using small- and
minority-businesses as much as possible.
Senator Jones. Dr. Spriggs, thank you for that, and I know
my time is running out. I cannot see the clock, but I would
like to call everyone's attention, both my colleagues' as well
as this panel, to a program that was started by Mayor Woodfin
in Birmingham with some of the largest companies in Birmingham,
Alabama, and it does just that. It recognizes that every
business has to seek minority vendors, minority-owned
businesses, bring in folks on their board, and also be more
transparent in mentoring. I think the private sector has a role
in this as well as the public sector.
So thank you all, and, Mr. Chairman, I probably have gone
over time, which I apologize for, but I cannot see the clock.
So thank you very much, Mr. Chairman.
Chairman Crapo. Thank you. We will make sure we get that
clock bright on your screen next time.
That concludes the Senators. Senator Brown has asked if he
could ask one more question, and then we are going to have to
run to our next vote, which should be starting any second now.
So, Senator Brown, please go ahead.
Senator Brown. Thank you, Mr. Chairman, for doing that. I
was really taken today by we all came--three people came in
with differing views on a lot of things, and there is broad
agreement that we need obviously a real stimulus package.
My only question is really a yes or no for Professor Scott.
Do you think Congress providing direct help to households is
critical for helping the economy recover, correct? His sound is
not on.
Mr. Scott. I have got to unmute myself. OK. The answer is
yes.
Senator Brown. Thank you. And I was taken, as I pointed out
to Mr. DeBoer, who came in here representing businesses,
obviously, also spoke repeatedly about rental assistance. So,
Mr. Chairman, there is broad--and, of course, Dr Spriggs is
making the case, the main part of his testimony, about
unemployment insurance and local government assistance and
others. So there is broad agreement the economy is in trouble.
The best way to address it is through direct help to
households. It means unemployment insurance. It means rental
assistance. It means support for State and local governments.
The House already passed a bill back in May, as we know, that
would take care of workers and renters and homeowners and
students and seniors and veterans. We should act on that bill.
But all the economic support in the world cannot solve our
problems if the President does not start taking the coronavirus
seriously. It might be uncomfortable, but it is time for my
Republican colleagues here in Congress, especially in the
Senate, to hold the President accountable, to speak to Senator
McConnell who said he saw no urgency in this, to speak to him,
to hold the President accountable despite the President's
continued attempt at gaslighting the country. Everybody on this
Committee, everybody in this Senate understands the pandemic
will not go away just because we decide to ignore it.
So thank you, Mr. Chairman.
Chairman Crapo. Thank you. And that does conclude the
questioning for today's hearing. Again, I want to thank each of
our witnesses for your counsel today and for being willing to
come and discuss this important issue with us.
For Senators who wish to submit questions for the record,
those questions are due to the Committee by Wednesday,
September 16. And to the witnesses, we ask that you respond to
these questions as quickly as you can after you receive them.
Again, we appreciate you being here, and this hearing is
adjourned.
Senator Brown. Thank you all. Good to see you all. Thanks
to all three of you.
[Whereupon, at 12:02 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
Today we welcome to this virtual hearing the following witnesses:
Mr. Hal Scott, President, Committee on Capital Markets Regulation; Mr.
Jeffrey DeBoer, President and Chief Executive Officer, The Real Estate
Roundtable; and The Honorable William Spriggs, Professor of Economics
at Howard University and Chief Economist, AFL-CIO.
It has been 5 months since the passage of the Coronavirus Aid,
Relief and Economic Security Act, or CARES Act, was signed into law.
Title IV of the CARES Act provided a $500 billion infusion into the
Exchange Stabilization Fund, in order to support the Federal Reserve's
emergency lending facilities.
That amount has been leveraged to provide trillions of dollars in
liquidity back into the markets, supporting credit flow and helping to
stabilize the economy.
Currently, there remains about $250 billion left from the CARES Act
funding.
Today, we will receive testimony from each witness providing an
update on the Federal Reserve 13(3) emergency lending facilities,
including recommendations on how the Main Street Lending Program and
Municipal Liquidity Facility could be changed to improve access to and
demand for the programs moving forward.
We will also hear an update on the State of the commercial real
estate (CRE) market; why the CRE market lacks access to needed support,
including through the Main Street Program; and recommendations for
options to get support to commercial real estate.
The Federal Reserve established the Main Street Facilities to
support lending to small- and medium-sized businesses and nonprofit
organizations that were in sound financial condition before COVID-19.
The Main Street program includes five facilities: the Main Street
New Loan Facility, the Main Street Priority Loan Facility, the Main
Street Expanded Loan Facility, the Nonprofit Organization New Loan
Facility and the Nonprofit Organization Expanded Loan Facility.
Treasury's equity investment of $75 billion into the Main Street
Program is estimated to provide up to $600 billion in credit to
eligible businesses.
However, there has been broad concern around the lack of broad
access to the Main Street Program, and so far its uptake has been slow.
One of the most significant industries to lack access to the Main
Street Program is the commercial real estate market.
On July 31, I sent a letter to Secretary Mnuchin and Chairman
Powell urging them to quickly expand the Main Street Program by setting
up an asset-based lending facility, and to address commercial real
estate either through access to the Main Street Program or in a
separate facility.
During this hearing, I look forward to hearing more about the State
of small- and medium-sized businesses in industry across the United
States and their access to financing; additional ways that the
facilities could be improved and expanded to provide access to more
industries; and recommendations for use of the remaining Title IV
funds.
As I noted in the hearing on Title IV implementation this Committee
held on June 2, I am still concerned that incorporating widespread
restrictions in these facilities could render the facilities
ineffective and leave businesses and their employees without critical
resources they desperately need.
The work to get these facilities up and running has been of immense
importance, and now it must be ensured that they are structured to
achieve the greatest impact for those in need.
I appreciate each one of you joining us today to share your
perspectives on these important issues.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
More than 150 years ago President Lincoln observed, ``It has so
happened in all ages of the world that some have labored, and others
have, without labor, enjoyed a large portion of the fruits. This is
wrong, and it should not continue.''
This pandemic is revealing just how true that still is today.
This week we celebrate Labor Day, a day when we honor the people
who make our country work--all workers, whether you punch a clock or
swipe a badge, whether you're raising children or caring for an aging
parent.
But workers deserve more than empty words in a tweet or an email
message.
For months we've seen advertisements and PR campaigns from big
corporations proclaiming how dedicated they are to the essential
workers that are keeping our country running--but Statements that
aren't followed up by increased pay or safer workplaces ring hollow,
whether they're from companies or Government officials.
This Labor Day, the country isn't living up to its promise to
workers.
Whether it's ending the $600 a week unemployment insurance that was
keeping millions of families afloat, or just the simple promise that
families won't lose their homes, under President Trump, our Government
has given up on support for workers.
We are on the precipice of another Great Depression.
And if you have the privilege to work from home and you've been
watching your stock portfolio slowly rebound, and you're thinking right
now, ``this guy's being alarmist,'' I have news for you--you don't
understand the real economy.
No matter how well the stock market is doing, no matter how high
bank profits and corporate profits are--if workers cannot work--and I
say ``can't work,'' not ``won't work,'' because workers are desperate
to get back on the job safely--our economy can't work. The President's
failure to get this pandemic under control is keeping tens of millions
of workers who want to go to work sitting on the sidelines of our
economy.
If people can't go to work, can't pay their rent or mortgage, can't
pay their car payment or credit card bills--the bottom will fall out of
this economy.
It has been over 6 months since we passed comprehensive coronavirus
relief for working Americans, and because of the President's failed
leadership, things have only gotten worse. He's allowed the virus to
rage out of control. Nearly 190,000 Americans have died in less than 6
months.
School districts have been forced to make impossible decisions--
reopen and put students and teachers at risk, or continue to teach
remotely, putting an unbearable load on working parents and widening
the achievement gap. State and local governments are trying to step in
and help, but their tax revenues are down because taxpayers have lost
their jobs and businesses have had to shut their doors or operate with
fewer customers. And that's only going to mean more layoffs of good
middle-class jobs, extending the cycle of misery.
After Leader McConnell and President Trump allowed the $600
expanded UI benefits expire, and refused to pass additional stimulus
checks and housing assistance and support for local communities, the
emergency lending programs we are talking about today are really the
only programs left operating to prop up our economy--and none of these
Fed lending programs are actually helping workers.
Dividends are still getting paid, and CEOs are still getting their
salaries and bonuses. The stock market continues to get a lift. If you
make your money from a brokerage Statement, the Government is still
helping you--in fact, you're pretty much the only one the Government is
helping.
But that help is not trickling down from big banks and corporations
to the people who make their money from a weekly paycheck--the vast,
vast majority of the American people.
It should be obvious to everyone by now that those benefits to the
wealthy never ``trickle-down'' to the workers who make this economy
run. They didn't with the corporate tax cut 2 years ago, and they
aren't now.
Instead, these programs are helping corporations--many of which
continue to lay off workers and have cut hazard pay for those who are
still risking their lives on the front lines of this pandemic, if they
even bothered to pay those workers hazard pay, to begin with.
We are going about this backwards.
Every dollar we give to working families goes directly to
supporting the real economy, when those families pay their rent and
their mortgages and their bills, and when they buy groceries and school
supplies and spend money at a local business. In fact, if we put
families and workers first, we wouldn't have to bail out any
corporations at all--the market that so many in this Committee profess
to put so much faith in would take care of that.
Of course, we also know our economy will not fully recover while
the virus is still not under control.
The CARES Act that we passed in March was designed to be temporary
relief--to get our workers and their families through the immediate
economic hardships while we marshalled all of our country's vast
resources and talent to stop a pandemic. The President failed to do
that, and now what we thought would be a relatively short economic
disruption has dragged on for months and months, with no end in sight.
We still have no mask mandate, we still have no national testing
strategy, we still have no effective contact tracing. We are seeing
another resurgence across 22 States. As a result, we're just 4 percent
of the world's population and 22 percent of the world's deaths.
Imagine if the President had taken this seriously in the spring.
Imagine if he'd said we should all wear masks and had modeled good
precautions we should all take. Imagine if he'd said we are going to
mobilize America's manufacturing talent and make enough tests to test
every public school by the summer. Imagine where we could be as a
society right now.
Instead, the President has given up on controlling this pandemic at
all until a vaccine is developed--and given the scope of his failures
thus far, we can only assume he will fail just as badly at distributing
a vaccine once that day comes if he's still in office.
The economy will not recover until this President, and his cabinet,
and his friends in Congress, take governing seriously.
Later this month, we'll have a hearing with Secretary Mnuchin and
Chair Powell. Unlike today's hearing, that one will be conducted in
person. That's because the President has told his top officials they
must testify in person, in his continued attempts to gaslight the
American people about the dangers of the virus.
We should be conducting all hearings remotely, not just to protect
Senators and Administration officials, but to protect all of the
workers in the Capitol--the janitors, Capitol police officers, and food
service workers who are forced to show up and put themselves at risk,
and then worry they are bringing the virus home to their families.
After 6 months of failures, I am honestly surprised that the
President's friends in Congress continue to let him get away with it.
Mr. Chairman, we need your help and your leadership. You have done
the right thing by conducting the rest of our hearings remotely, and we
need you to demand that the White House sends the right message about
taking the coronavirus seriously--tell Secretary Mnuchin he needs to
testify remotely. I have no doubt Chair Powell would be happy to do so
if you asked.
And we need your help convincing Mitch McConnell to extend direct
support for families while we fight this virus and get our country back
on track. The House has already passed a bill that would take care of
workers, renters, homeowners, students and seniors, and veterans. We
all know this ``emaciated'' McConnell proposal isn't going to help any
of those families keep food on the table.
When something isn't right, we speak up--that's the job we signed
up for. And right now thousands of people are dying each day, and
Republicans aren't speaking up.
The best way Congress could celebrate Labor Day this year is by
doing its job. And we need your help to tell President Trump and Mitch
McConnell that it's time to get to work. We have wasted too much time
already.
Thank you.
______
PREPARED STATEMENT OF HAL S. SCOTT
Emeritus Professor, Harvard Law School, and President, Committee on
Capital Markets Regulation
September 9, 2020
Thank you, Chairman Crapo, Ranking Member Brown, and Members of
this Committee for inviting me to testify before you today on the
Treasury/Federal Reserve Main Street Lending Program (MSLP). My
testimony today regarding the MSLP is based on the September 3
Statement of the Committee on Capital Markets Regulation (CCMR), of
which I am the President. With respect to other issues, the testimony
is my own, and does not necessarily represent the views of CCMR.
CCMR is an independent 501(c)(3) research organization, financed by
contributions from individuals, foundations, and corporations. CCMR's
membership includes 37 leaders drawn from the finance, business, law,
accounting, and academic communities. CCMR's Cochairs are R. Glenn
Hubbard, Dean Emeritus of Columbia Business School, and John L.
Thornton, Chairman Emeritus of the Brookings Institution. Founded in
2006, CCMR undertook its first major report at the request of the
incoming U.S. Secretary of the Treasury, Henry M. Paulson. Almost 15
years later, CCMR's research continues to provide policymakers with an
empirical and nonpartisan foundation for public policy.
CCMR believes that small- and medium-sized businesses (SMEs) will
need financial support for several years to recover from the impact of
the COVID-19 pandemic. A key part of this support should come from the
MSLP authorized by the Coronavirus Aid, Relief, and Economic Security
Act (CARES Act). The MSLP comprises five facilities, three of which are
targeted at for-profit business and two of which are targeted at
nonprofits. My testimony is focused on the three for-profit facilities.
So far these facilities, which have been operating for over 2 months,
have not delivered the anticipated results.
CCMR therefore recommended that MSLP be significantly restructured
to: (1) take on more credit risk, by providing that the Federal Reserve
make 100 percent of each loan, rather than 95 percent as presently
provided, leaving banks and other eligible financial institutions as
processors; and (2) provide below market terms for borrowers who are
unable to obtain credit from their existing lenders. The MSLP loans
from the Federal Reserve should be on a first-come first-serve basis,
based on objective criteria, to ensure that the Government is not
picking winners and losers. Policymakers must also reach out to the
hardest hit and underserved communities so that they can take advantage
of the program. Extraordinary Federal intervention such as the MSLP
must end as soon as the need for such a program has dissipated. CCMR
supports the current end-date of December 31, 2020, which can be
reevaluated in the coming months.
The need for expanded support for small- and medium-sized
businesses has been intensified by the current congressional deadlock
over new appropriations for these firms. Congress has already
appropriated $454 billion in the CARES Act to back Fed lending
facilities. This appropriation should be used now to help Main Street.
1. Small- and Medium-Sized Businesses (SMEs) Need Government Help
Small businesses have been hard hit by the COVID-19 pandemic. Dun &
Bradstreet's Small Business Health Index reported a decline for June
2020 reflecting an increase in business failure and payment delinquency
rates at small businesses during Q2 2020. Certain sectors have been
disproportionately affected by the pandemic: as of mid-August, revenues
at transportation businesses had declined by 67 percent compared to the
same week last year; revenues at arts and entertainment business had
decreased by 44 percent; and revenues at restaurants had declined by 19
percent. Also through mid-August, 64 percent of local arts and
entertainment businesses and 39 percent of bars and lounges had not
processed a single transaction for three straight days. In a recent
letter, more than 100 current and former CEOs of some of America's
largest companies, major trade associations and small businesses warned
that without longer-term support from the Federal Government, small
business owners are facing financial ruin.
Medium-sized businesses have also been hard hit. Moody's Analytics
reported that, as of mid-June, middle market corporations had
experienced across-the-board increases in their expected default
frequency. And the default rate on private debt rose to 8.1 percent in
Q2 2020 from 5.9 percent in Q1, according to the Proskauer Private
Credit Default Index, which measured 546 private loans issued mainly to
private-equity-backed mid-sized businesses.
As credit conditions at middle market firms deteriorate, these
companies are finding it harder to borrow to meet their liquidity
needs. The Federal Reserve--July 2020 Senior Loan Officer Opinion
Survey on Bank Lending Practices reported that 71 percent of
respondents reported tightening their lending standards on loans to
large and medium-size firms, making it harder for these firms to obtain
bank financing. The Fed's survey also reported that demand for such
loans from borrowers had decreased, likely due to the unattractive
terms that banks must offer to offset the credit risk posed by such
loans. Indeed, the Association for Corporate Growth has reported that
81 percent of its middle market members that tried to get a loan though
the MSLP could not.
A V-shaped recovery, meaning that the economy will within the next
year or so bounce back to a pre-COVID level, is unlikely. Such a
recovery is inconsistent with the predictions of the Federal Reserve
and most economic forecasters, given the path of the virus, elevated
unemployment and concern over a possible cascade of business failures
in the services sector. According to the latest economic projections
from Fed officials, the economy will contract by anywhere between 4
percent and 10 percent this year. Most officials do not expect the
economy to recover completely until 2022. While the latest unemployment
figures have improved, the unemployment level is still very high at 8.4
percent, and as Chairman Powell observed last week, there are still 11
million fewer Americans working than there were in February.
The generally buoyant U.S. public equity market is not a sign that
all is well. The market indices are dominated by large-capitalization
firms, some of which--especially in the technology sector--remain
strong despite the pandemic lockdown. Sectors that have been hardest
hit by the pandemic, such as department stores, airlines, and travel
services, make up a small fraction of the major market indices, and the
vast majority of SMEs are not publicly traded at all. Moreover, while
Fed liquidity and low interest rates might help support public equity
values, they do not necessarily portend a quick economic recovery.
Some have expressed concern that distressed SMEs will not want to
borrow from the MSLP. While it is true that in many cases their
condition has worsened since the enactment of the CARES Act, SMEs, if
solvent, will likely still borrow if it is their only hope of
maintaining their business as a going concern. Of course, such loans
will be risky but, as I shall shortly expand upon, the Treasury needs
to be prepared to take that risk.
In summary, SMEs face prolonged balance sheet stress and need
financial support from the Government. Given the importance of these
firms to the U.S. economy--middle market businesses, in particular,
represent one-third of private sector GDP and employ approximately 44.5
million people--such support is key to economic recovery.
2. The MSLP and Credit Risk
When the CARES Act was enacted over 4 months ago, Treasury
Secretary Steven Mnuchin and Fed Chairman Jerome Powell said the Act's
$454 billion in appropriations could be levered by the Fed to support
up to $4 trillion of loans. The Treasury subsequently announced that it
would set aside $75 billion of this appropriation to support $600
billion in loans to SMEs under the Main Street facilities on April 9.
These programs, after several revisions, became operational on July 6.
As of September 2, the Fed had purchased about $1.2 billion in loans
through the MLSP, implying that $1.3 billion in loans had been made
under the MSLP. The Federal Reserve currently discloses transaction-
specific data about the MSLP monthly. As of July 31, 2020, the program
had only purchased participations in 13 loans, ranging in size from
$1.5 million to $50 million. Secretary Mnuchin has estimated that
between $25 and 50 billion in loans will ultimately be issued through
the MSLP. This level of lending, if it does occur, will be far short of
the MSLP's lending capacity of $600 billion and what is needed for
economic recovery.
One of the major reasons for the performance shortfall, has been
the policy of the Treasury to avoid taking credit risk. While the Main
Street facilities are operated by the Fed, the Treasury, pursuant to
Dodd-Frank amendments to Section 13(3) of the Federal Reserve Act, must
approve them and therefore controls their terms. Secretary of the
Treasury Mnuchin Stated in April, ``I think it's pretty clear if
Congress wanted me to lose all of the money, that money would have been
designed as subsidies and grants as opposed to credit support.'' The
terms of the MSLP reflect the Treasury's view by requiring lenders to
retain 5 percent of all loans and to apply normal credit standards
(which they would do anyway given their exposure).
On August 4, Chairman Crapo offered the following amendment to the
``shell'' rescue bill submitted by Senate Majority Leader McConnell,
which would amend the CARES Act to provide: ``In making loans, loan
guarantees, and other investments . . . the Secretary shall prioritize
the provision of credit and liquidity to assist eligible businesses,
States and municipalities, even if the Secretary estimates that such
loans, loan guarantees, or investments may incur losses.'' Senator
Crapo and Congressman Patrick McHenry have also written to Secretary
Mnuchin and Chairman Powell, urging them to use funds appropriated
under the CARES Act to expand the MSLP.
CCMR strongly supports Senator Crapo's amendment, to remove any
doubt of congressional intent. We urge the use of unallocated CARES Act
funds to backstop potential losses from the MSLP. Government-backed
loans to borrowers that cannot meet normal credit standards unavoidably
involves credit risk, but taking such risk is necessary to support an
economic recovery that would be slower without such lending.
3. Required Changes in MSLP
For the MSLP to support SMEs in an effective manner, two major
changes need to be made: (a) the Fed should make 100 percent of the
loans with financial institutions acting as only processors; and (b)
the terms for borrowers must be below market.
a. Fed and Treasury Bear Credit Exposure, Lenders as Processors
For the MSLP to work, lenders cannot be required to hold 5 percent
of each loan. The requirement that lenders bear credit risk is a major
obstacle to the effectiveness of the MSLP. Lenders are unwilling to
lend to the neediest borrowers who are uncreditworthy under normal
standards. And borrowers that can meet normal credit standards do not
need the MSLP at all.
As of August 10, only 522 financial institutions had registered to
participate in the MSLP. That number represents less than 5 percent of
eligible lenders. Moreover, of those 500 financial institutions, just
160 of them stood willing to publicly accept loan applications from new
customers that lack a preexisting relationship with the lender. Larger
banks had played a minimal role in MSLP lending as of early August;
more than 90 percent of lenders registered to participate in the MSLP
had less than $50 billion in assets and those lenders were responsible
for more than 95 percent all MSLP loans.
Once saddled with credit risk, lenders will rightly apply normal
credit standards, with the effect that the borrowers who need financial
assistance will not qualify for loans. While 5 percent of each loan may
not seem significant, multiple small stakes in risky loans add up. We
therefore agree with the recommendation of Senators Loeffler, Braun,
Cornyn, and Tillis, in their August 4 letter to Secretary Mnuchin and
Chairman Powell, that the most effective solution to the bank credit
standard obstacle is to eliminate the risk retention feature
altogether.
To the extent that the infrastructure already put in place by the
Federal Reserve is sufficient, the Fed could lend to borrowers
directly, circumventing banks entirely. If that is not feasible, then
banks--and other nonbank financial institutions certified by the Fed--
should remain in place solely as processors. Banks and other financial
institutions that act as processors should be paid a reasonable fee,
based on their costs, for processing loans.
b. Specific Terms
As for specific terms, CCMR suggests the following, consistent with
the below market approach:
Loans should be unsecured, since the most distressed
borrowers do not have collateral.
The maximum loan size should be increased. Under the
current terms, which tie maximum loan size to the borrower's
outstanding debt relative to earnings, many SMEs are excluded
from participation as a result of their current high leverage.
One way of avoiding such disqualification is to tie the maximum
loan size to the borrower's business expenses as reflected on
its most recent Federal tax return.
The minimum loan size should be reduced to $100,000 (from
$250,000), consistent with the average size of PPP loans.
The interest rate on MSLP loans should be lowered to a
fixed interest rate of 1 percent per annum (currently, MSLP
loans have an adjustable rate of LIBOR plus 3 percent) with no
fees charged to borrowers (currently, borrowers can face fees
of up to 200 basis points).
The term should be extended to 10 years (from 5 years).
Prepayment should be without penalty (consistent with
current terms).
Amortization should be on a 30-year schedule, with the
balance due after 10 years.
Eligible borrowers should be required to certify that:
they are solvent;
their need for credit arises from the pandemic;
the amount borrowed is related to their actual cash
business needs;
the funds borrowed will be spent on their business; and
they could not obtain funds in the amount applied for
under the MSLP from their existing bank (this certification
would prevent creditworthy borrowers to which banks would
otherwise lend from obtaining below-market loans from the
MSLP).
Loan documentation, which is currently complex and lengthy,
should be simplified. Currently, borrowers have to digest more
than 160 pages of documentation, supply more than 140 data
fields, and are subject to quarterly reporting requirements.
These information and reporting requirements are a significant
obstacle for smaller borrowers and exceed what borrowers
typically provide to banks for standard business loans.
Some have suggested that what is needed for the most distressed
firms is an equity injection rather than increased lending. In
principle, this may be true but it is impractical to restructure the
capital of SMEs on any scale in a timely way. That would require the
consent of existing investors and significant legal costs. The terms we
recommend for the Fed's debt would be similar to patient equity, given
the significant risk of nonpayment.
Another potential concern is that extending loans on below-market
terms will lead the Fed to prop up businesses that are no longer
viable. But the risk that viable businesses will go under en masse
without additional support generally warrants greater risk-taking by
the Fed and Treasury. And the Fed can mitigate the risk of lending to
nonviable businesses by consulting private data, including from
providers like Dun & Bradstreet, to screen out businesses that are
unlikely to survive even with additional credit support. The Fed, or
the banks and financial institutions acting as processors, can ensure
that borrowers meet viability requirements, although such requirements
must be clear and objective to avoid confusion and delay. In addition,
the borrowers must make certifications as to their solvency and that
the amount borrowed is related to their cash needs and will be used in
the business--such certifications will be difficult to make for
unviable businesses.
The MSLP must ensure that owners cannot siphon off the proceeds of
Government loans to themselves through executive compensation,
dividends, or share repurchases. The CARES Act establishes certain
limits on owners from doing so. Businesses that receive MSLP loans are
prohibited from paying dividends or repurchasing shares until 1 year
after the loan is no longer outstanding. During the same period, MSLP
borrowers cannot pay annual compensation, over any 12 consecutive
months, to officers or employees in excess of the sum of $3 million
plus half the amount by which an officer or employee's 2019
compensation was over $3 million. MSLP borrowers also cannot increase
compensation over any 12-month period for any employee that was paid
more than $425,000 in 2019. In addition, as set forth in the CCMR
proposed terms, borrowers should be required to certify that they will
use the proceeds of any MSLP loan solely for the benefit of the
borrower's business. The proceeds of an MSLP should not be used to
repay liabilities of the company which are personally guaranteed by any
of the shareholders.
CCMR generally opposes Government intervention in private business.
Extension of MSLP loans should therefore only be tolerated in the
short-term. CCMR therefore supports the CARES Act's time-limited
approach to the MSLP, as funds appropriated under the CARES Act can
only be used to backstop loans made before December 31, 2020.
4. Expansion of Treasury Support for MSLP
Given the increased credit risk that would result from our
suggested redesign of the MSLP, Treasury may have to increase the $75
billion in equity that it has committed to the program. Fortunately,
the Treasury has ample ability to do so. As of September 2, the CARES
Act facilities, apart from Main Street, held only $17 billion in loans
backed by $65 billion in Treasury funds. The existing backing of non-
Main Street facilities is excessive given the low number of loans, so
some of this backing could be redeployed to Main Street.
Apart from this existing backing, the Treasury has $351.5 billion
in CARES Act funding that it has not yet used--a significant portion of
this unused amount can be added to support a redesigned MSLP.
5. Ensuring Targeted and Equitable Access to Credit
According to one estimate, businesses eligible for the MSLP employ
an estimated 45 million workers, almost 40 percent of all private-
sector workers. Yet the MSLP has seen limited take-up. That is in part
attributable to the program's current terms, which warrants the changes
we recommend. But it is also, in part, a product of a widespread lack
of knowledge about the MSLP; many small businesses do not even know
about the MSLP or that they are eligible for it. One recent survey of
middle-market companies found that more than one-fifth of respondents
were unaware of the MSLP; others know about it but mistakenly think
they are ineligible. This is a particular problem for minority-owned
businesses. Using data supplied by Dun & Bradstreet, about which
businesses would benefit most from access to the MSLP and those for
which such borrowing is too late, the Treasury and Federal Reserve
should coordinate, along with private lenders, outreach to and
enrollment assistance for eligible borrowers with a chance of survival.
6. Loans for New Businesses
The COVID-19 pandemic may permanently alter the structure of the
U.S. economy. But this is not a reason for Treasury and the Federal
Reserve to sit on the sidelines while SMEs fail because of cash-flow
disruptions. Rather they should seek opportunities to facilitate a
quicker transition to a new, postpandemic economy. To that end, the
Treasury and Federal Reserve should also explore the possibility of
adding a new facility, perhaps under the MSLP, to support access to
credit for new businesses. A facility of this sort would not provide
equity to new startup businesses; but once a new business has secured
equity financing from private sources it could be eligible for debt
financing on appropriate terms.
7. Conclusion
Main Street's recovery is crucial for the U.S. economic recovery.
CCMR recommends that Congress enact Senator Crapo's proposed amendment
to remove any doubt that Congress's intent in enacting the CARES Act
was for the Treasury to take credit risk. If such legislative action
cannot be achieved, we would recommend that the Senate Banking
Committee clarify Congress's intent in a bipartisan letter to Secretary
Mnuchin.
There is no guarantee that the extraordinary measures recommended
by CCMR will succeed in saving American small- and medium-size
businesses. But the current approach has been tried and found wanting;
the recommendations set out here would give many small- and medium-
sized businesses in America a fighting chance. Each day that we wait to
help Main Street further damages the prospect for economic recovery.
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PREPARED STATEMENT OF WILLIAM E. SPRIGGS
Professor of Economics, Howard University, and Chief Economist, AFL-CIO
September 9, 2020
Thank you, Chairman Mike Crapo and Ranking Member Sherrod Brown,
for this invitation to give testimony before your Committee today on
the issue of where the economy stands with the status of the Federal
Reserve's emergency lending facilities. I am happy to offer this
testimony on behalf of the AFL-CIO, America's house of labor,
representing the working people of the United States, and based on my
expertise as a professor in Howard University's Department of
Economics.
We began this year with the world facing a novel virus for which we
lacked adequate cures and that proved more deadly than most flus we had
encountered. The lethal potency of the virus and its easy spread
required a new set of responses. Given the lack of a cure and its
costly nature of care on people and health systems, the world adopted a
policy of social distancing and isolation to prevent its spread. This
policy proved very effective in reducing deaths, and for the Nations
that took aggressive measures, like New Zealand, proved highly
effective in ending the virus' threat.
But, despite the huge economic benefits of these policies, slowing
the economy to carry out social distancing had huge costs, too. By all
measures, the benefits of saved lives alone, far outweighed the cost of
slowing the economy. It is important to note, that in the United States
where our implementation of social distancing policies was very uneven,
it is also clear that the uncertainty of COVID itself, slowed economic
activity. The United States policy variation has clearly documented
that social distancing policies are not the driver of the economic
slowdown, but the spread of the disease is the cause of the economic
slowdown. The difference is in the efficacy of the policy in slowing
down the virus spread.
This virus has caused the greatest decline in global economic
activity since World War II. It has affected the Gross Domestic Product
of every advanced economy according to the Organization for Economic
Cooperation and Development. In response to this tremendous and
unprecedented slowdown, economic policymakers everywhere have responded
with swift, large, and bold actions. The U.S. Congress took early
action to sustain the economy this Spring. Two quick acts of Congress,
the Family First and the Cares Acts, bought time for policies to
contain the virus to take hold. Unfortunately, while the economic
policies were effective, the policies to contain the virus in the
United States have lagged those of other countries, so our economy now
enters a new phase of high uncertainty because of COVID without the aid
of those earlier bold actions.
In March, the uncertainty of COVID slowed certain economic activity
in the United States that led to the first month of job loss, ending
its record string of growth. But April brought the most dramatic loss
of jobs in U.S. economic history. In that 1 month, we lost more than
twice the jobs lost over the course of the Great Recession. While other
advanced economies planned for social distancing by massively
subsidizing payroll, America chose to dump workers into our
unemployment insurance system. Rather than subsidize payroll, we chose
to try and subsidize workers within the unemployment insurance system.
To approximate preexisting payroll, an additional $600 was added to
weekly unemployment benefits. This policy choice might have worked the
same as with other advanced countries if COVID were put under control,
and sufficient economic certainty were restored for households to
resume normal consumption.
However, there were many challenges to using the U.S. unemployment
insurance system. The greatest job losses in April, almost 8 million,
were in the leisure and hospitality industry. Our Nation's unemployment
insurance laws were not well designed for these workers, and in normal
economic times, workers in those industries are the least likely to
receive unemployment benefits when they become unemployed--fewer than 8
percent in 2018. And, at its peak during the Great Recession the system
handled a little over 3 million in May 2009, but received over 6
million at the end of March 2020, and had a 4-week average above 3
million for 7 weeks from April to May. This overwhelmed the system and
created backlogs, delays and confusion for American households that had
lost labor income.
Congress also granted the Federal Reserve funds and unprecedented
latitude to devise policies to maintain liquidity in the capital
markets. This let the Fed take steps to ease blockages in public
finance and corporate borrowing that had frozen markets for those
needed lines of liquidity. In periods of heightened uncertainty, a
primary function of the Fed is to reduce uncertainty so the financial
markets can function. But this case was different because the
uncertainty from COVID were high and affected a broad range of economic
actors, many that do not rely on Wall Street, but need access to
liquidity from the commercial banking sector. Here the Fed was met with
restrictions from the U.S. Treasury on how to devise plans to help
those firms that live on Main Street. As with the Payroll Protection
Plan loans overseen by the U.S. Treasury, banks were the primary
financial intermediary. And, as with the PPP program, the banking
sector proved both inadequate to the task and a reluctant participant.
The banking sector also showed the problems of discrimination that
plague banking, and access to minority-owned firms was greatly limited.
Further, rather than let the Fed take advantage of the funds from
Congress to assume room for risk in making loans, the U.S. Treasury
limited this possibility, resulting in the program under the Fed's
control as far more limited than would have been desirable given the
uncertainty we faced.
However, at this point, it is not clear whether the primary concern
should rest with the Fed. The economic scarring of the downturn is
taking hold on the economy. The initial plans of the Family First and
Cares Acts to bide the economy over the COVID fight, now confront
unemployment levels looking like the Great Recession. It is no longer
the case that the best set of policies are in deepening the debt
position of companies or households. Increased debt burdens in those
sectors would lead to a weakened recovery as both the household and
business sectors would engage in balance sheet consolidation during the
early stages of a recovery, slowing down the economic rebound. In fact,
most companies have already leaned toward increasing their cash
balances, given the uncertainty that COVID has created. And, initially,
those households with the greatest discretion used their Economic
Impact Payments to consolidate their balance sheets as well, paying off
debts or increasing their cash balances, too.
The jobs report we got from the U.S. Bureau of Labor statistics for
August was very revealing in respect to where the economic challenges
now stand. First, the report was the first since the end of the $600
weekly Federal Pandemic Unemployment Compensation payments to the
unemployed. This gave a final test of whether those payments had
distorted labor market participation by encouraging lower wage workers
to stop seeking employment opportunities. Several studies looking at
the effect of the FPUC showed there was no effect on labor force
participation, with some showing it had a positive effective, mostly
because the additional benefit encouraged many low wage workers to
apply for unemployment benefits and thus get and remain engaged in the
labor market. In normal economic times, low wage workers are the least
likely to apply for unemployment benefits. And, research has shown
unemployment insurance benefits help workers remain in the labor
market, rather than become discouraged and drop out of the labor force.
Clearly in August, there was no spike, or break in trend with labor
force participation, putting to final rest the payments were a
disincentive to returning to work.
This new information we have on the performance of the FPUC is key
because it showed clearly in the data from the U.S. Bureau of Economic
Analysis the role the FPUC had in offsetting the significant drop in
aggregate payroll for personal income. Without that money channeled to
households, the economy will have a hole it cannot make up. Available
evidence on spending patterns, clearly showed that the FPUC and the EIP
payments kept consumption smooth for the bottom 75 percent of American
households. Absent that support, to offset lost payroll income, we are
heading into the final quarters of this year facing a huge headwind.
Second, the report showed a slowing down in the job bounce back
from April's decline. In May, with some key hotspots under better
control, like New York city, employment was able to return quickly.
Spikes in COVID activity around the country after Memorial Day, however
have slowed the employment rebound. We remain down over 11 million jobs
from our peak in February of this year. That is greater than the depths
of the Great Recession. The number of workers losing jobs permanently
is rising in step with the pattern of the Great Recession, as is the
number of workers unemployed over 26 weeks. The rate of net job
creation is too slow to get those numbers down, and those losses mount
on personal household balance sheets. A feedback loop can set in to
slow the recovery in aggregate demand and slow the recovery in jobs.
So, this adds to the affect of the missing $600 FPUC payments in
unemployment checks.
The share of unemployed workers who are from households with little
wealth and no liquidity is rising. The initial recovery for jobs has
been far more rapid for White households than for Black and Hispanic
families. Black and Hispanic families have significantly less wealth
and liquidity than White households. The result is that a $1 drop in
labor income leads those households to experience a greater than drop
in consumption than for White households. The extra $600 the FPUC
provided to unemployment benefits is needed for these households to
maintain spending and keep aggregate demand at levels to sustain the
macroeconomy. And, because Black and Asian American workers face
discrimination in the labor market, they have the longest duration of
unemployment spells. The loss of job for them has far greater financial
risks. Consequently, the $600 FPUC does not carry the same work
disincentive, as they face much lower probabilities of an unemployment
spell ending with a job; meaning, their prospective loss of income from
refusing a job offer is much higher. This dimension of racial equity
underscores another important element of the FPUC.
Other advanced economies that chose to subsidize payrolls, have
much lower levels of unemployment than the United States. They will
enter the final quarters of the year with healthier household balance
sheets and they have managed to do a far better job of containing the
virus. For the United States to enter the final quarters in a similar
position will require maintaining personal income as best possible.
Having chosen the path of using our unemployment system as the avenue
of maintaining payroll employment levels, we have little choice but to
continue down that path by keeping the FPUC up.
The Fed cannot maintain personal consumption, or solve the COVID
mystery. So, it must rely on the Congress to take actions to maintain
household incomes. That can only be done through fiscal actions.
Similarly, State and local governments are constrained by State
constitutions in borrowing money to balance their fiscal issues. They
are essentially, public actors under a single currency. As such, State
and local governments must look to the Federal Government and Congress
to act to provide stability in the face of macroeconomic uncertainty.
In this economic situation, State and local government austerity will
be counter-productive to an economic recovery, and further complicate
the situation because they are playing a vital role as partners in
getting COVID under control. At this point we need State and local
governments to increase their investment in the safe return of workers
to employment, and students to their schooling; while maintaining State
and local government investments in the rest of our Nation's
infrastructure. The great lesson of the Great Recession was the drag
that State and local government austerity can play on economic
recovery. As we enter the final quarters of this year, we will be
facing the new fiscal years for State and local government. An
additional headwind of drag from public investment austerity will make
recovery even more difficult.
We are heading into the final quarters of this year with a more
severe labor market than the depths of the Great Recession while facing
headwinds from the household and public sector. This is dangerous. We
rely on households to pay rents, make mortgage payments and to buy the
goods that let small businesses pay their rents and workers.
Ultimately, the health of our financial sector rests on the real
economy, and households making the payments that repay the loans the
financial sector has made. Currently, the Fed has taken the actions it
must to reassure the financial markets there is sufficient liquidity
for businesses to borrow to keep up business. But the Fed cannot pay
off the loans that banks make.
What we are risking at this point is a failure of the real economy
that increases uncertainty that loans will be repaid. That is something
that Congress alone can address. It can keep to its course of
maintaining payroll through adequate unemployment insurance payments,
and keep the household sector afloat until the uncertainty of COVID is
reduced and households return to normal consumption patterns, or it can
watch personal consumption collapse and try and deal with the fall out
that may contaminate the solvency of the financial sector. Congress can
maintain the State and local government sector, its vital partner in
getting COVID under control, or face disappoint in deploying a vaccine
when, and if, one becomes available and the needed steps for safe
opening of more workplaces.
Congress should hope the Fed can maintain the economy while it
waits to act. The Congress can ask the Fed to be as aggressive as
possible in making lending available to restart the economy. Congress
can direct the U.S. Treasury to loosen the reigns and let the Fed be
more creative in getting funding to Main Street, recognizing this is a
period of higher risk but also where more risk must be taken to ensure
that when the recovery takes hold we have the greatest competitive
balance our economy can maintain.
But, in conclusion, Congress must act. It cannot pretend that jobs
will magically appear and the labor market will heal itself before the
loss of payroll income collapses demand. It cannot wish the job crises
away, anymore than it can wish COVID away. Actions are needed on both
fronts, and a full economic recovery is not possible without actions on
both fronts.
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM HAL S. SCOTT
Q.1. Should the Federal Reserve lower the minimum loan size for
the Main Street Lending Facility to encourage participation by
smaller businesses?
A.1. Yes, to $100,000.
Q.2. Should the Federal Reserve consider extending the loan
terms for the Main Street Lending Facility for a year or more?
A.2. Yes, there should be 10 year maturity on the loans.
Q.3. Should the Federal Reserve continue to require banks
retain 5 percent of the loan through the Main Street Lending
Facility?
A.3. No, it should make 100 percent of the loans. Banks are
very reluctant to loan if they bear credit risk for less worthy
but more needy borrowers.
Q.4. Do you think the employee retention provisions in the Main
Street Lending Program are adequate?
A.4. Yes.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM HAL S.
SCOTT
Q.1. In August 2020, it was reported that the Primary Market
Corporate Credit Facility (PMCCF) had yet to make a single
purchase and the Secondary Market Corporate Credit Facility
(SMCCF) was only holding around $3.6 billion of the Facilities'
combined $750 billion corporate debt-buying capacity. It has
also been reported that while some of this debt was purchased
from struggling companies, the SMCCF has also purchased from
cash-heavy companies performing well in the stock market. The
Federal Reserve argues that buying bonds from massive companies
keeps major employers in a healthy position. Others argue the
emergency funding is going to the wrong place.
What do you make of these criticisms?
A.1. Do not have an opinion.
Q.2. How have current eligibility requirements for PMCCF and
SMCCF affected overall uptake of these programs?
A.2. Do not know.
Q.3. What do you think are the biggest barriers to entry for
companies looking to participate in the Federal Reserve's debt-
buying program?
A.3. Do not know.
Q.4. Some of the 13(3) Facilities, such as the PMCCF and SMCCF,
require applicants to have ratings from nationally recognized
statistical rating organizations (NRSROs) that are accompanied
by one of three ``major'' credit rating agencies. The Federal
Reserve also requires some applicants to obtain ratings no
later than the date a facility was stood up. I've recently
partnered with Senator Tim Scott to introduce the Access to
Emergency Credit Facilities Act, which would mandate the
Federal Reserve open up the programs to all qualified NRSROs
registered with the Securities and Exchange Commission.
Do you think limiting ratings to one of the three major
NRSROs has limited access to the Federal Reserve's corporate
bond purchasing and other relief programs for small- and mid-
size companies?
A.4. Do not know.
Q.5. Do you think opening up these programs to other credible
ratings agencies will help the Federal Reserve purchase more
debt from those most in need?
A.5. Do not know.
Additional Material Supplied for the Record
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