In response, Maryland Gov. Larry Hogan (R) enacted a budget freeze and suggested that the state may use its entire $1.2 billion Rainy Day Fund. Over the weekend, New York announced $10.1 billion in budget cuts over this next year, including a $8.2 billion reduction in aid to local governments. The 2008 financial crisis showed state austerity — severe cuts to public programs — that may plug budget holes in the short-term will prolong economic downturns in the long run.
To avoid this catastrophe, Hogan must solve our state budget crisis by taking three actions: (1) demanding unconditional federal relief, (2) borrowing from the Federal Reserve and (3) establishing a state public bank.
As chair of the National Governors Association, Hogan has rightly taken the first step by leading the call for $500 billion in federal relief to states and localities. While Hogan voiced optimism on Sunday for a bipartisan consensus from the Trump administration and congressional leaders, it is imperative the $500 billion target is met in the next congressional package. New Jersey Gov. Phil Murphy put it bluntly last week: “Unlike the federal government, we can’t print money.”
However, even if relief is included, the Treasury Department’s terms for the initial $150 billion of state relief as part of the Cares Act is restrictive to the point of rendering the funds useless. Murphy noted that most of New Jersey’s $1.8 billion aid will need to be returned because the relief can only cover costs “not accounted for in the [state] budget most recently approved,” meaning the relief can only be used for new costs directly associated with the coronavirus crisis — not for the basic cash flow problem every state is facing. If there is a consensus building in Washington, it must be that federal relief to the states is unconditional.
In the face of this uncertainty on the federal level, Maryland must begin taking its fate into its own hands. The other state relief as part of the Cares Act was the unprecedented move by the Federal Reserve to open the “Municipal Liquidity Facility” (MLF), its vehicle for directly purchasing bonds from states, counties and cities. In effect, this provides an immediate and novel tool for Maryland to monetize debt simply by issuing eligible bonds and the Fed agreeing to provide the cash.
Murphy, a former Goldman Sachs banker, was savvy to begin exploring this option immediately, which could secure up to $9 billion for New Jersey and its towns. The current terms allow for Maryland to monetize up to $8.25 billion, more than enough to stopgap the burgeoning cash flow problem. With this lifeline available, Hogan must publicly commit to using it and to not leave any money on the table.
The MLF stopgap is the necessary immediate step, but, for a sound recovery, we must also take steps to ensure Maryland’s economy doesn’t experience hyper-consolidation following the pandemic. The $4.2 trillion corporate bailout — the centerpiece of the Cares Act — is essentially free cash for the corporate and financial sectors. On March 15, the Fed took the “nuclear option” by setting the discount window at 0.25 percent — its lowest interest rate ever alongside 2008 — allowing for near-zero borrowing costs for Wall Street banks and investors. States, on the other hand, will still pay interest on their Fed borrowing.
The problem of the federal response is that it leaves stimulus decisions to private banks. For the Payroll Protection Program (PPP), the Cares Act’s lifeline for small businesses, the banks set their own terms for which receive support and which do not. Underlying banking inequities are amplified: Minority-owned small businesses stand virtually no chance of receiving aid, and large restaurant and hotel chains received the maximum $10 million grant. Despite that there is no risk posed to the banks, they raked in more than $10 billion in fees over PPP’s first two weeks.
In this crisis, it has become clear that banks are a public utility — just like water, energy and broadband — playing an essential role in the government’s response to overcoming the crisis. To ensure lines of credit into our communities do not dry up, Hogan must use his emergency powers to charter a state public bank.
Public banks are banking institutions managed by the government in the public interest, providing a depository for state funds. A public bank for Maryland would provide a number of critically needed economic benefits: (1) direct access to the Fed’s stimulus tools, (2) a digital payments platform for distributing benefits and (3) sound investment in local economies to prevent the incoming corporate consolidation.
Because of the crisis, the Fed has encouraged banks to borrow from the discount window to cover all their liquidity needs, which would allow a public bank to borrow at will for near-zero cost and at no risk to the state’s funds. On its own, this would mean a profound shift in how the state and its agencies, universities and localities finance their operations — the state could lend to itself on its own terms.
The recent scramble to improve Maryland’s unemployment insurance administration illustrates another key function offered by the public bank: a digital payments platform. Such a system would provide every person in Maryland with access to a digital wallet account (think PayPal or Venmo). Rather than state and local governments distributing benefits through various uncoordinated channels (prepaid cards, direct deposit, mailed checks), the bank would provide any government entity a central channel for transfers, vastly improving the efficiency of payments in a time when swift delivery is a matter of life or death.
Beyond the crisis, the public bank would extend much-needed countercyclical credit into Maryland’s economy, much like the Bank of North Dakota (BND) — the only active public bank in the United States — did after the 2008 financial crisis. From 2008 to 2011, North Dakota had the lowest unemployment rate, the lowest default rate and the highest payroll growth rate of the country. From 1995 to 2014, the BND returned $957 million of its profit to the state general fund — $3,300 per family — and the state budget has been in surplus since before and after 2008. The state has the highest lending by local banks and most banks per capita in the United States, which is attributable to the BND’s partner bank model. A thriving local banking network, supported by a state public bank, would provide Maryland the best defense against the incoming corporate consolidation.
Austerity is typically framed as “necessary” action, as if there is no choice other than to cut $10 billion from the budget. Maryland’s current trajectory toward austerity — with no proposed solution by state leaders — will be unnecessarily harmful. With the crisis throwing the old ideas of what worked out the window, we have to look at the answers in front of us — and unconditional federal relief, borrowing from the Fed and chartering a public bank are the only fiscal solutions being offered. Maryland must act now before a year-long health crisis becomes a decade-long economic one.