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Writer's pictureTom Cochran

Non-forgivable Fed Loans Aren't Much Good to Anybody in the Public or Private Sectors.

Former Fed insider Dr. Claudia Sahm has published a terrific critique of the Fed, rooted in that Institution's long running failure to use its monetary policy toolkit to pursue full employment as aggressively it has pursued it's other mission of fighting inflation. And - music to my ears - she bravely raises the idea of forgivable debt for states and localities, as well as hard-pressed businesses not covered by the PPP program. (I missed Dr. Sahm's piece - which also has some very interesting recent fed history - whenever it was carried in the NYTimes print editions, but thankfully I found it on-line dated 10/16.)


In the likely absence of Congressional federal fiscal policy action (e.g. passing of some version of the HEROES Act or the SMART act, both of which would provide direct grants to replace non-recoverable state and local revenue shortfalls) the Fed really should be using it's existing emergency powers to provide forgivable debt to those states and localities with persistently high unemployment, making fuller use of the $500 billion Municipal Liquidity Facility (MLF) that has gone virtually unused except for borrowings by the State of Illinois and New York's Metropolitan Transportation Authority (MTA). The MLF's creation certainly accomplished it's inflation- fighting and general stabilizing goals of calming the municipal note and bond markets but only by making forgivable loans can it also help the economy toward full employment.


And there is another so -far under-utilized gigantic pot that could be used for forgivable loans to mid-sized companies in high unemployment areas. As Rachel Siegel and Jeff Stein point out in today's Washington Post, ""The Fed’s “Main Street” lending program has the capacity to issue up to $600 billion in loans to midsize businesses. But for months, businesses and banks have said that the program’s rules are so restrictive that companies desperately in need of a lifeline are being turned away".



So wouldn't that step take the Fed across the dreaded Rubicon into fiscal policy land? Well, yes, but If Congressional gridlock continues on another substantial Covid relief bill, the rapidly rising macro-economic risk and the full-employment mission of the Fed would seem to demand that that river be crossed.


But what about the spiking National Debt?


The best summary I've seen today of all the reasons why we shouldn't be worrying about that at this stage in what is clearly not a V-shaped recovery but is instead of reverse square root-shaped recovery appears today in Paul Krugman NYT column.


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