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How State Officials Can Save Main Street in the Face of COVID-19:
Three Urgent Actions

States can tap these three new funding possibilities to rescue communities from financial catastrophe
and provide for future fiscal health.

Honorable Governors and Treasurers,

As states and cities face a tsunami of emergency expenses, collapsing tax revenues, and a shrinking bond market, we wanted to bring to your attention some new funding possibilities that have recently opened up. The Federal Reserve has stepped up to the plate by relaxing some of its rules and dropping interest rates to zero, but only for banks. The state could take advantage of this opportunity by having its own bank, something that could be done quickly by Executive Order. That and two other new funding possibilities are detailed below.

#1 Use your emergency powers to set up a state-owned public bank. The Fed is now making its discount window available for loans at 0%-0.25% and is encouraging banks to use that facility to extend credit where needed to alleviate the current crisis. It has also eliminated the reserve requirement for loans. We are told by our banking advisors that the basic mechanisms for a bank could be set up in a matter of a month. Capitalization for the bank could be acquired either from funds allocated by Congress to states under the CARES Act or from existing revolving loan funds or rainy day funds. The bank could then provide the low-cost credit communities urgently need, granting 1% loans as Germany’s public bank KfW does, vs. the complex SBA programs charging 3.75%. It could also work with community banks to fund loans to small and medium-sized businesses that are too small to qualify for the Fed’s new Main Street Lending Program.*

#2 Take advantage of the Federal Reserve’s new Municipal Liquidity Facility for direct access to the central bank. The Fed has now funded a new Municipal Liquidity Facility, which enables states and cities to sell short-term notes of 24 months or less directly to the Fed — no need to go through the private bond market first. The Fed is still in the process of determining the loan terms, including the interest rate. We recommend that state governors work together to press for 0%-0.25% loans — the same rates that banks are now receiving. PBI Advisory Board member Prof. Robert Hockett has proposed a game plan for how states can put this facility to immediate use.

#3 Access low interest loans under Federal Reserve Act 14(2)(b). This section of the Act already provides for purchase of 6 month debt instruments from states and municipalities, but the Fed has never exercised that option. Again we recommend collaborating with other state governors to urge the Fed to activate this section with favorable terms to the states.

We don’t want to overburden you with information in this very busy time, but if you’re interested there is much more to share. We would be pleased to offer our insights and those of the economists and bankers on our Advisory Board in helping your financial staff proceed with any follow-up actions.

Additional details are included below:

These actions enable systemic changes that will not only rescue the state in these troubling times, but will create jobs, protect and expand the tax base, build a better safety net for all people, and ensure economic resiliency. 

Among other important benefits that a state-owned bank could provide are:

  1. Permanent access to lines of credit directly from the Federal Reserve at 0.0% to 0.25% interest rather than substantially higher rates for muni bonds. These funds can be rolled over indefinitely, since the Fed’s discount window is always available to banks in good standing.
  2. Potential to quickly provide a digital payment system for facilitating State cash management needs, including a mechanism to distribute funding to State residents under the CARES Act.
  3. Ability to extend credit counter-cyclically when there’s a crisis, which will generate new revenues from its loans and counter-balance the rapidly increasing costs of municipal and state bonds. Public bank profits benefit the state and its residents, not out-of-state private investors.
  4. State-focused investment for pension funds, which are once again plummeting in value from the collapse of corporate investments.

* The Fed’s Main Street Lending Program is an unprecedented program through which the central bank will be buying $600 billion in loan participations consisting of four-year loans to companies employing up to 10,000 workers or having revenues of less than $2.5 billion. Principal and interest payments will be deferred for one year. Eligible banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses. States will have no say in this program unless they have a publicly-owned bank that provides loan participations as a service to the banking community.

We feel this is a unique, time-sensitive opportunity for States to appeal to the Fed for the same deferential consideration that private corporate banks have enjoyed for decades, and for the State’s federal representatives to express that need to the Secretary of the Treasury.