Congress passed a coronavirus stimulus bill (CARES Act) intended to put money in the hands of individuals and organizations. Two large programs are the Paycheck Protection Program (“Paycheck” or “PPP”) and the Main Street Lending Program (“Main Street”). We don’t yet know, officially, how these programs will be paid for. My goal here is to predict and express my opinion on how we will fund these two emergency loan programs.
“Paycheck” loans will be forgiven by the SBA if organizations meet the payroll and employee retention requirements of the legislation, while the “Main Street” loans will be handled a little differently. 95% of these loans will be purchased from lending banks and held by the Federal Reserve. Does that sound familiar? At first glance, it seems to be similar to what happened with the “quantitative easing” measures occurring during Obama’s administration.
It’s important to understand that the Federal Reserve manages the money supply, it doesn’t borrow money. The Federal Reserve has a Congressional mandate to maximize employment while controlling inflation. Quantitative easing (“QE”) is part of the Fed’s frequently used “open market operations.” Other Fed tools include adjusting the fed funds rate, the discount rate, and the bank reserve requirement.
During the QE activities of the last administration, the Fed purchased financial assets, e.g. U.S. Treasury debt and mortgage backed securities, from banks. That increased the money supply and stimulated the economy by flooding banks with capital. “Balancing the books” with taxes or borrowing wasn’t necessary. This type of expansion of the money supply is often referred to using the metaphor “printing money,” and it’s accomplished with a computer “keystroke.” There are no printing presses involved.
Using the Fed to expand the money supply isn’t unique to progressive administrations. In 2009, Chairman Ben Bernanke, when asked about funding the $1 trillion 2008 bank bailout, explained: “It’s not tax money. The banks have accounts with the Fed much the same way that you have an account with a commercial bank, so to lend to a bank, we simply us a computer to mark up the size of the account…It’s much more akin to printing money than it is to borrowing…We need to do that because our economy is very weak and inflation is very low.”
We don’t yet know how much of the CARES Act stimulation will employ tactics like quantitative easing. Will some loans be repaid as were the 2008 bank bail-out loans, or will we see the more permanent “easing” characteristics of the last administration? Most “Main Street” loans will be purchased by the Fed, and I predict they will be substantially repaid, thereby reversing most “money printing” characteristics. On the other hand, “Paycheck Protection” loans will be mostly forgiven, suggesting this can be a permanent expansion of the money supply. We can’t yet be sure.
The economic shut-down is history. Given that reality, I must decide if I support providing significant financial relief? If I do, how would I suggest paying for it? Should funds be provided from taxes, issuing government debt, or should we use money supply management by the Federal Reserve?
Regarding America’s current financial emergency, managing the money supply can be a productive tool for emergency economic stimulation when unemployment is high and inflation is low, but those measures must be temporary and limited. Aggressive emergency money supply management during financial crises has been used, and will be again, by administrations representing both parties.
If the government decides to use monetary policy management tools to fund at least portions of the CARES Act, I approve. I endorse the Federal Reserve ability to prudently and aggressively manage the money supply when the country faces an existential financial threat such as accompanied this pandemic. I believe that’s how we will fund portions of the CARES Act, such as those I’ve described above. At least for those programs, we may find out that neither taxes nor issuance of new debt is triggered.