This week U.S. Treasury Secretary Steven Mnuchin told a group of Republican senators they need to act to prevent an increase in the unemployment rate to 20%. While some would say that is political hyperbole, it is not. Policymakers, investors and company managers will observe a jump in first-time jobless claims next week likely to be in the millions and an increase in the unemployment rate toward 10% in coming months.
It is time for bold and persistent action to limit the increase in bankruptcies and unemployment. Risks to the real economy are such that U.S. Treasury and Federal Reserve need to move quickly to bolster the small and medium-size enterprises that comprise Main Street. Unlike the financial crisis, the shocks working their way through the American economy are aimed straight at the real economy and there is no time to lose.
What would such a policy look like? The current state of play based on our conversations with policymakers, political actors, central bankers and our clients implies that the plan detailed below be implemented to avoid greater economic and financial peril.
A viable plan
First, the U.S. Treasury should put forward an $85-billion dollar backstop behind $915 billion in liquidity commitments from the Federal Reserve to fund a $1-trillion so-called Temporary Corporate and Small Business Lending Facility. The policy goal of such a facility beyond the aforementioned employment and solvency objectives is to facilitate the flow of credit to businesses that finance a wide range of economic activity.
This lending facility would utilize the domestic banking system to lend to small and medium-size enterprises that comprise the real economy, the backbone of Main Street responsible for the creation of 70% of all new jobs during the recent business cycle. By doing so, bridge financing can be distributed in a quicker and more efficient manner than the fiscal stimulus working its way through the Small Business Administration and other federal agencies.
This crisis requires action, liquidity and lending in a matter of hours and days, not months.
Second, the terms of such a lending facility should be generous. A rate of 2.25% to be repaid on a quarterly basis over a five-year term combined with the fiscal and monetary firepower put forward will result in full subscription of the temporary lending facility. Eligibility should be generous; all firms with revenues of $5 billion or less are eligible to participate.
Third, the past 20 years of social and economic crisis have taught us one lesson: such economic and social shocks demand that policymakers act decisively, move quickly to curtail the problem and be willing to sustain temporary policy for longer than anyone will be comfortable.
Swift action required
In, fact our interaction with our clients and business contacts implies that such a facility might be oversubscribed. While the aforementioned policy prescription is robust, we have advised policymakers to be bold and go big. We would recommend a $250-billion Congressional backstop combined with $1.25 billion in liquidity guarantees by the central bank. Smart, forward-looking policymakers might use those same terms and lend at one percent, branding the lending facility “One for America.”
In our estimation this would be a considerable step toward stabilizing financial markets and the economy. Most importantly, the move would signal to SME’s that populate the real economy they will not be left behind to fend for themselves as they were during the Financial Crisis. Then next months will be difficult but there will be social and economic life on the other side of the crucible we are caught in.
Time is short. Stabilization policy needs to target those that are going to bear the burden of adjustment as supply, demand and financial shocks cause large, albeit temporary, disruptions in the economy. Whatever the case, the array of monetary and fiscal policy put forward cannot just target Wall Street and upper-income households in an attempt to jump-start the economy in the aftermath of what is going to be an economic crash.
Policy put into place must target Main Street. It must provide bridge loans, not bailouts. It should target trade, not tariffs. Anything less will undercut the legitimacy of the policy that will reshape the American economy in the aftermath of the crisis. The fiscal and monetary authorities need to act now.