Small and midsize businesses have been hit hard by the pandemic, but they aren’t getting the help they need. Why, when the Cares Act provides direct assistance to the Treasury to assist these firms? Congress now has a chance to get to the bottom of it. On Tuesday the Senate Banking Committee will hold its first quarterly hearing on the Cares Act. It will hear from Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell. Three questions should frame the hearing:
- Who is responsible for designing small and midsize business relief programs? The Treasury is required by law to approve any Fed lending facility, which must be adequately collateralized and available only to solvent borrowers. Do these requirements explain why the Treasury has specified the Fed facilities’ permissible leverage and other key terms?
We question whether the Treasury has delegated sufficient authority to the Fed to put together a successful program. Does Treasury believe its approval power gives it the right to design the terms of the Fed facilities as a condition for its backing? (Mr. Powell should be asked the same question, as he has said it is “up to the Treasury to decide how much it is prepared to lose.”) It must be clear who designs these programs, so Congress can hold the appropriate party responsible.
- Why is Treasury risking so little money to save Main Street? Congress enacted the Cares Act nearly two months ago. It authorized the Treasury to provide at least $454 billion to back the Fed’s “Main Street” facilities, particularly to lend to small businesses and state and local governments. So far, by our calculation, the Treasury has provided only $195 billion of Cares Act support for Fed lending facilities. Only $75 billion of it has gone to Main Street, with $35 billion aiding governments and the rest going to support the financial system.
Why is Treasury holding back more than half the funds? Why has it used only 16% to back Main Street? It may be prudent to keep something in reserve, but this is too much. And why is the Fed taking so long to get the programs off the ground? Businesses are ailing, and reserves can do only so much good once Rome burns.
- Why is Treasury making a priority of not losing money? The design of the Main Street facilities makes it extremely difficult for needy small businesses to qualify for loans. Since banks must retain 5% to 15% of the loans, they justifiably will apply normal credit standards to avoid excessive losses. In fact, the facilities will require banks to do so.
The Treasury’s “base-case scenario” is “we recover our money,” Mr. Mnuchin said last month. “If Congress wanted me to lose all the money, that money would have been designed as subsidies and grants as opposed to credit support.”
Congress didn’t direct the secretary to lose all the money. But didn’t it direct him to risk losing some of it to mitigate a cascade of small-business failures? As with the Troubled Asset Relief Program in 2008, certain Cares Act facilities may be profitable while others are not. Does Treasury think Main Street should be profitable? On Tuesday, Congress must make its will clear.
The Fed’s vice chairman for supervision, Randal Quarles, testified last week that “we expect to be repaid” on these loans. Given the facilities’ purpose—helping struggling businesses—Mr. Powell should be asked why the Fed has this expectation.
He should also have to justify the Main Street facilities’ onerous borrowing terms. If borrowers are very creditworthy, wouldn’t banks lend to them without the Treasury’s backing? We thought the point of these facilities was to help firms that aren’t creditworthy enough to get help on their own.
The goal shouldn’t be to maintain every firm and job, but policy can stimulate credit flows to counter the pandemic’s effects. With easier qualification and better terms, the Main Street facilities can be a critical part of the business restart.
But design is destiny. If the Senate Banking Committee concludes that the Treasury’s principal direction to the Fed should be to limit losses, or if the Fed insists on this approach, the Main Street facilities will fail, eliciting little interest from lenders and offering little help to borrowers. Why allow these avoidable problems to cause more business closures and job losses? Messrs. Mnuchin and Powell owe Congress an answer.
Mr. Hubbard, a professor of economics and finance at Columbia, was chairman of the Council of Economic Advisers under President George W. Bush. Mr. Scott is an emeritus professor at Harvard Law School and director of the Committee on Capital Markets Regulation.