MNI POLICY: Fed Advisers Warn of Massive Small Business Crash

By Pedro Nicolaci da Costa

     WASHINGTON (MNI) - The Federal Reserve's Community Advisory Council in

recent meetings called on the central bank to make significant changes to its

emergency credit programs aimed at small businesses and municipalities in order

to reach some of the hardest-hit communities in the Covid-19 pandemic.

     The group cited estimates that "the loss (permanent closure) of small

businesses will be somewhere between 25 percent to 30 percent or even greater"

nationwide, with huge implications for the country's employment and recovery

prospects.

     As markets remain on edge about a possible second wave of infections, the

Fed released records of two meetings held by its Community Advisory Council, one

in April and the other in May. The council normally only meets twice a year, but

another meeting is still expected in November.

     "Given the unprecedented public health and economic impacts of the

coronavirus pandemic, the Federal Reserve's Community Advisory Council was asked

to convene for two meetings in the first half of 2020 with the Board of

Governors," the May report noted.

     The report broke with a precedent of sticking to observations about the

economy from community, nonprofit and labor leaders. This time, it included

robust recommendations that the council believes will make the Fed's programs

more likely to reach those in the greatest need.

     The council criticized the Fed and Treasury's Paycheck Protection Program,

arguing that "many eligible and affected businesses have been unable to access

PPP financing."

     To fix the problem, the Fed and other policymakers "should build upon

recent actions to include non-depository institutions to allow a greater number

of Community Development Financial Institutions (CDFIs) to access this

facility," the council said.

     "These actions could include lowering the eligibility thresholds regarding

previous loan portfolio sizes to include smaller CDFIs, at least up to their

historical levels, and creating incentives for correspondent lenders to serve as

intermediaries to facilitate access."

     --MAIN STREET

     The Main Street Lending Program could also be expanded, or new facilities

created, the report said "to provide greater support to nonprofit organizations

and the critical services they provide to low and middle-income communities."

The Fed has expanded Main Street and the Municipal Lending facilities since the

council's May meeting, but they did not directly address the CAC's demands.

     Bolstering the finances of state and local governments is another key way

of supporting small businesses, the report added, so that they can continue to

expand their own small business finance programs.

     While the Fed's Municipal Liquidity Facility "has helped ensure that

municipal bond markets remain functional," the council "urges participation in

this facility be expanded to directly include much smaller municipalities."

     The report was especially worried about hard-pressed rural communities

being left out of the lending bonanza.

     "These population thresholds leave out rural America, as well as many

mid-sized cities impacted by disruptions and suspended operations at factories,

universities, hospital systems, and other key facilities," the report said.

--MNI Washington Bureau; +1 202 371 2121; email: pedro.dacosta@marketnews.com

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