In mid-September, the Federal Reserve faced a simple question from regulators: Why are profitable corporations being offered money from the central bank at a far cheaper interest rate than local communities? In one instance, Chevron was able to borrow money at half the rate as Wisconsin — meaning the oil giant was effectively getting a government subsidy, while state taxpayers were being offered a predatory rate. Why?
Fed officials had few answers and still haven’t addressed the iniquity. The result is a perverse dynamic: cheap Fed cash is boosting corporate profits, stock prices, shareholder dividends, and executive pay, all while budget-strapped states and cities are being forced to choose between high-interest loans or mass layoffs of teachers, firefighters, emergency workers, and other public-sector employees during a deadly pandemic.
It doesn’t have to be this way, according to a coalition of lawmakers and grassroots groups that have launched a campaign for reform. Their demands are straightforward: they want the Fed to use its authority to make long-term loan commitments to cities and states at 0 percent interest — the rate that the Fed already lends to Wall Street banks. Proponents say that would allow municipalities to avoid mass layoffs and also save $160 billion in annual interest payments they pay Wall Street firms on their past debt.
“I represent a working-class immigrant community, and the financial collapse hit us hard,” said Democratic Rep. Chuy Garcia of Chicago. “We talk about the financial crisis, but we don’t talk enough about the austerity that came after the Great Recession. Austerity was a choice. State and local governments need to get the financing they need,” said Garcia, urging the Fed to take action.
$160 billion is no small amount: a new report from the Action Center on Race and the Economy shows how that’s enough to “help 13 million families avoid eviction by covering their annual rent” or enough to “provide all 31.5 million unemployed workers $600 a week in Pandemic Unemployment Assistance for eight weeks.”
Arbitrary Rates Help Corporations and Crush Local Communities
Under existing law, the Fed has wide latitude to adjust interest rates on loans to corporations and local governments — which means it is making the choice to give powerful politically connected companies vastly preferential lending terms, while holding states and cities hostage with usurious interest rates.
While the Fed has emerged as a key player in the COVID-19 crisis as a backstop for Wall Street and providing mass liquidity in the corporate bond market, the Fed has only purchased two bonds in its Municipal Liquidity Facility (MLF), lending just $1.6 billion of the $500 billion of lending capacity it has. Instead of lending at the rate that it lends to banks — with the interest rate currently at zero — the Municipal Liquidity Facility has offered loans of at least 1 percent for terms of twenty-four to thirty-six months.
Events over the last two months illustrate how arbitrary the rates are.
In August, after the Congressional Progressive Caucus criticized the Fed for failing to do enough to encourage cities and states to use the MLF, the Fed lowered the interest rate by 0.5 percent.
Then, during the September 17 hearing of the Bailout Oversight Commission that oversees the Fed’s pandemic lending programs, commissioner Bharat Ramamurti spotlighted a major discrepancy in lending rates between an oil giant and the state of Wisconsin.
“The Fed is using public money to purchase a bond from Chevron at a rate of 0.9 percent over more than 4.5 years,” Ramamurti said. “A state like Wisconsin, with the exact same rating as Chevron, has to pay 1.28 percent over three years.”
Ramamurti added that while the Fed purchased a Philip Morris bond at 0.75 percent interest, a state “ government like Kentucky, which has the exact same credit rating as Philip Morris, [must] pay an interest rate of more than 2 percent over three years.”
The arbitrariness of the Fed’s municipal interest rate became an issue in the potential layoffs of thousands of municipal workers in New York City. Union leader Henry Garrido said he had reached out to the Municipal Liquidity Facility to attempt to fend off the possible layoff of twenty-two thousand of his members.
“The Fed was offering a 1.9 percent at twenty-four months — we could do twice better in the outside market,” said Garrido. “Then they called us again after intervention by leading Democrats and said, ‘We’ll offer thirty-six months and lower to 1.6 percent.’ We can still do better on the regular market.”
On October 14, a broad group of organizations including the National League of Cities came out in favor of an expanded MLF program. The Bailout Oversight Commission’s September monthly report was delayed, Ramamurti has alleged, because of Republicans wanting to obscure the unanimity of support for an expanded MLF.
“The fifty-basis point cut [in August] showed that there was no deeper logic behind the rates,” said Nathan Tankus, the research director of the Modern Money Network. “Why wasn’t it already set up with the lower rate? The fact that you can cut that price shows that it’s arbitrary.”
The Revolving Door
The Fed’s ability to respond to the scale of the coronavirus crisis could be limited by the revolving door between the Fed and Wall Street.
The Fed official in charge of the Municipal Liquidity Facility, Kent Hiteshew, was the first director of the Treasury Department’s Office of State and Local Finance from 2014 to 2017 during the Obama administration.
As a result, he played a “key role” in the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which bailed out Wall Street bondholders of Puerto Rican debt, and entrenched brutal austerity measures in Puerto Rico under the rule of a Financial Control Board. The present in Puerto Rico, with massive cuts to government services, could be the future across the country if the MLF is not expanded and Congress does not extend aid.
Prior to his time in the Obama administration, Hiteshew had spent eighteen years at Bear Stearns. Before that, he worked at Drexel Burnham Lambert, the criminal junk-bond firm headed by Michael Milken.
Many leading Wall Street banks, brokerage firms, and law firms have lucrative municipal finance businesses that would be undercut by a more direct and comprehensive MLF program.
Tankus added: “The Fed has two bazookas. One of them is a municipal bazooka and the other is a corporate credit bazooka. They have the municipal bazooka setting on low and the corporate bazooka setting on high.”