◼ ECONOMICS Bloomberg Businessweek December 7, 2020
31$525.0bPaycheck Protection
ProgramMain Street Lending
Program*$5.8b▼ Value of loans issuedIt sounded like a great idea back in April. With
the economy getting hammered by Covid-19, the
Federal Reserve hatched a bold plan to rescue
thousands of midsize companies that were fall-
ing into a gap between government aid programs.
Using its magic printing press, the U.S. cen-
tral bank would take $75 billion appropriated by
Congress and turn it into as much as $600 billion
in loans to companies damaged by the pandemic.
The effort now appears to have been doomed
from the start, squeezed between legal restric-
tions on the Fed’s emergency powers and the risk
aversion of the banks that the program relied on
to make loans. Eight months in, the Main Street
Lending Program has pushed less than $6 billion
out the door.
“There’s been bipartisan acknowledgment
that Main Street isn’t working,” says Bharat
Ramamurti, who sits on the congressional com-
mission charged with supervising the spending
authorized by the Coronavirus Aid, Relief, and
Economic Security Act. “I don’t think anybody
is under the illusion this program is solving the
problems that exist.”
Treasury Secretary Steven Mnuchin announced
on Nov. 19 that he wouldn’t approve an extension
of the program, along with four other emergency
lending facilities, past Dec. 31, but Democrats
might be able to revive it. Some, including Virginia
Senator Mark Warner, clearly want to. “As we’re
looking at the virus actually accelerating at this
point, and the potential for businesses even
going into more duress, the idea that we’d end
the program arbitrarily on Dec. 31—I just think
makes no sense,” Warner says. “We think we
need to make adjustments on both program eligi-
bility, loans terms, and weight, so this works for
more firms.”
It’s difficult to see how a few tweaks would
suddenly resolve the real issues that afflict the
program. Those start with the limits on the Fed’s
emergency powers. The central bank can lend
almost infinite amounts of money, but it can’t
give it away. That means the Fed must reasonably
expect repayment on loans and must charge rates
that won’t end up undercutting private lenders.
The institution hasn’t run into those issues
in the other programs it unfurled this spring to
prevent capital markets from seizing as they did
during the 2008 financial crisis. The Fed used
two facilities to buy ultrashort-term securities
from money-market funds and from banks that
act as market makers for all investors. It also lubri-
cated longer-term credit markets by announcing it
would buy corporate and municipal bonds.
The central bank’s purchases amounted to tiny
slivers of these vast markets, but its reassuring
presence caused private investors to flood back
in, knowing they wouldn’t get trapped with illiq-
uid holdings if panic returned.
While the Fed was tending to the needs of
larger companies, the Treasury Department was
teeing up a rescue for small businesses. Despite a
messy launch, the Paycheck Protection Program
ended up ladling out about $525 billion in loans,
most of which morphed into grants when borrow-
ers used the funds to keep workers on their pay-
roll and to pay bills.
Slipping between these safety nets was a whole
layer of businesses—estimated to encompass 40% of
the U.S. economy—that were too big for PPP and too
small to access the bond market. So on April 9 the
Fed unveiled a plan that looked like a win for every-
one: Midsize companies would be thrown a lifeline,
preserving jobs and helping to sustain the economy,
and the Fed would show it cared about Main Street.
Vincent Reinhart, a former senior economist
at the Fed, says the central bank took a lot of
heat in the last financial crisis for going all-out to
help big banks while appearing not to lift a finger
for the average American. “It was Wall Street vs.
Main Street, and going into this it was evident Jay
Powell wasn’t going to make that mistake again,”
says Reinhart, referring to the Fed chair. “I’m not
saying it was insincere, but I am saying it was stra-
tegic, as well.”
Despite the good intentions, the Main Street
Lending Program’s effectiveness has been ham-
pered by crucial design flaws. Unlike with its
other emergency programs, the Fed must rely on
banks to process the loans, as it lacks the capa-
bility to do its own underwriting. To come up
with a set of terms that would entice lenders—as
well as borrowers—to participate, Fed staff con-
sulted extensively with banks and companies.
The upshot: Funds didn’t begin trickling out until
July, almost three months after the first of the
PPP money.
Since then, the Fed has continued to fiddle with
the Main Street rules, and it’s lowered the mini-
mum loan size, but the changes haven’t worked:
As of Nov. 25, the program had purchased just
$5.8 billion in loans from banks.
In a survey released in September, loan offi-
cers told the Fed that “overly restrictive” terms
for borrowers and “unattractive” terms for lend-
ers were preventing the program from taking off.
When a company was deemed worthy of credit,
banks preferred to make loans without the Fed’s
participation, the respondents said. And when