“We expect to take some losses on these facilities. That is our base case scenario,” Mnuchin told senators Tuesday at a hearing on the Cares Act funds.
Many economists were glad to hear those words from the treasury secretary, because there was concern he was being too cautious at a time when he needed to get money out quickly. Congress gave Mnuchin $500 billion to come up with programs to help airlines, hotels and other struggling businesses make it through this crisis. He’s supposed to work with the Federal Reserve on distributing it. The whole point of this money is to try to prevent a massive wave of business closures and another Great Depression.
The global pandemic has decimated nearly every business outside of grocery stores and Netflix, leaving a lot of companies on the brink of going belly up. If Mnuchin only helps the companies in the best shape — the equivalent of A students — then a lot of businesses on the borderline of making it are going to go under. He won’t have done enough to prevent a Great Depression scenario, economists say.
“The biggest risk is the government doesn’t do enough right now,” said economist Julia Coronado, president of MacroPolicy Perspectives. “That money should be flying off the shelf, especially to mom and pop businesses.”
No one wants to see all $500 billion lost, but losing a little taxpayer money on these programs is the equivalent of a basketball player fouling a time or two during a game — taking a few risks to win the game. In this case, the goal is to avoid a repeat of the Great Depression. In the process of trying to save a some companies on the borderline, a few may ultimately fail. Yet, the hope is other borderline companies will make it, because of the federal loans, also saving jobs and supply chains.
Mnuchin talked about the possibility of losses from the rescue efforts twice on Tuesday. It was a notable departure from April, when he kept emphasizing publicly that Treasury and the Fed were likely to break even or make money on these rescue program.
“We’re looking at it in a base case scenario that we recover our money," Mnuchin told reporters in April.
Many are comparing the Cares Act business rescue loans to what the federal government did during the 2008-09 financial crisis by giving a lifeline to financial institutions and car companies. That program — known as the Troubled Asset Relief Program, or TARP — did lose money on a few rescues. But overall, TARP ultimately made several billion dollars as most companies repaid the loans and some of the stock the government took as collateral turned out to be worth a good bit more when it came time to cash in.
But this is a different scenario, economists say. The pandemic has hit an even larger swath of the economy this time, creating more risk if companies go under and triggering a domino effect that takes out others.
It’s not any company’s fault that they are struggling to make it through the Great Lockdown. While there was a lot of public outrage at the government bailing out financial institutions in 2008-09, there isn’t a corporate villain this time around, many say. Experts keep stressing to policymakers that it’s far better to be accused of doing too much to save businesses, especially small businesses, than doing too little.
“There are troubling signs that Mnuchin is being more cautious than Congress intended and than the economy needs,” wrote Michael Strain, an economic policy expert at the American Enterprise Institute, in a recent Bloomberg News column. “Economic recovery requires taking risks.”
Strain said Mnuchin’s remarks this week were a “shift in the right direction,” but it remains to be seen if action backs up the words.
One of the biggest criticisms of the government aid so far is that it’s been going out too slowly and tentatively, especially the $454 billion that Treasury is supposed to send to the Fed. The Fed, in turn, is supposed to act like a bank and use that as seed capital to lend out about ten times that much.
“Right now, the biggest risk is we don’t do enough,” said Steven Ricchiuto, chief U.S. economist at Mizuho Americas. “The Cares Act appropriated $454 billion for the Treasury to use for special [lifelines to businesses]. They’ve only used $195 billion of that so far.”
It remains to be seen how much risk Mnuchin and Fed Chair Jerome H. Powell — the two partners distributing the $454 billion — ultimately take. These are new programs and policymakers are trying to walk that fine line between wanting to help a lot of businesses while also not being reckless with taxpayer money.
The delicate balance was on full display Tuesday during the Senate hearing. Some senators grilled Mnuchin and Powell about why they were not getting the money out faster and why they had put so many restrictions on the aid. For example, midsize businesses can’t get a Fed loan unless a bank is willing to accept at least 5 percent of the risk of the loan. Some question whether banks are likely to help borderline companies given that requirement.
But others, including Sen. Elizabeth Warren (D-Mass.), had a fiery exchange with Mnuchin about why he was giving this money to companies so easily. She wanted more restrictions, including a requirement for companies not to fire workers while they have the loan.
“The law gives you the specific authority to determine the terms on which these loans are made,” Warren said. "Are you going to require companies that receive money from this half-a-trillion dollar slush fund to have to keep people on payroll?
Mnuchin responded that Congress set out the basic terms of the loans on a bipartisan basis. He noted that for the Main Street Lending Facility expected to start making low-cost loans beginning next month to small and midsize businesses, "we have put in a provision that we expect people to use their best efforts to support jobs.”
Warren wasn’t satisfied with that answer and the idea of companies doing their “best effort” to keep people employed while getting a government lifeline loan.
The pressure is clearly on Mnuchin and Powell. This week they said they would err on the side of doing more, not less. But so far, they have yet to show it in their actions. Many economists think the duo has been too timid.
In the next 10 days, the Main Street lending program and a separate program to help struggling cities and states are supposed to be up and running. How generous those programs are will be telling.