State Treasurers Join In Asking FED to Use Special Law to Help Pave Way Out of Crisis
While governors occupy the pivotal role in tackling the health challenges presented by the coronavirus disease COVID-19, state treasurers need to design and build bridges to span the financial gulf created from inevitable revenue losses.
That is especially important in relation to borrowing to fill the void created by so many people and businesses on forced furloughs of unknown duration.
“Yes, we want every tool at our disposal,” said New Mexico state treasurer Tim Eichenberg about a proposal asking the Federal Reserve Bank to use its statutory power to assist states and local governments.
Friday morning, in Bloomberg’s “The Weekly Fix,” Cross-Asset reporter Luke Kawa wrote about the proposal asking the Fed utilize its authority under Section 14(2)(b) of the Federal Reserve Act to help states deal with the financial fallout from the coronavirus disease COVID-19.
The authors of the proposal, Skanda Amarnath of Employ America and Yakov Feygin of the Berggruen Institute, argue such an action by the Federal Reserve would provide some stability for state governments and maybe avert some of the draconian actions anticipated in states when the full brunt of an expiring economy hits not too far down the road.
The Candle spoke at length with Skanda Amarnath about their recommendations that the Fed move as quickly as possible in exercising its authority to assist state and even local governments as they begin expending billions of dollars to protect and provide treatment to their residents.
He and Feygin wrote in their report that “The statute makes clear that the Fed has the authority to provide short-term financial support to state and local governments. Indeed, the most basic historical function of central banking is to ensure that the critical short-term financing needs of the sovereign are met in a time of crisis. The evident purpose of Section 14(2)(b) is to enable the Fed to lend directly to any entity of the federalist system to achieve its broader objectives.”
Amarnath pointed out that Chair of the House Financial Services Committee, Congresswoman Maxine Waters (D-CA) echoed this call for the Fed to take immediate action. She has also proposed expanding the Fed’s authority to support state and local governments among her set of legislative proposals.
He also pointed to a new bill filed by New Jersey U.S. Senator Robert Menendez, which would also supplement the power the Fed has under the existent statute.
The sponsors of the concept were joined by the treasurers of several states, writing the following to FED Chair Jerome H. Powell and the Board of Governors of the Federal Reserve System:
“We are writing to request that the Board of Governors exercise its unilateral authority under “Section 14(2)(b) of the Federal Reserve Act and purchase short-term securities in the municipal debt market as needed to stabilize state governments’ financing needs.
“The states are taking unprecedented actions to expand healthcare capacity while continuing to support existing initiatives. At the same time tax revenues are reducing and financial market turbulence could freeze the municipal bond market.
“We are seeking the Federal Reserve’s support to ensure that financing constraints do not hinder the necessary response to COVID-19.”
When The Candle spoke with Eichenberg late today, he said he was in communication with other state treasurers and their national association.
Besides Eichenberg announced support, at the time of publishing this report, treasurers from Maine, Nevada, Illinois, Wisconsin, Massachusetts, Maryland, Rhode Island, Oregon, Pennsylvania, Connecticut, and Colorado had signed the letter referred to above.
Another document circulating amongst treasurers warns the “general economic decline resulting in declining state revenue projections, and the potential delay of income tax revenues as a result of IRS action may create a need for states to borrow for cash management purposes for the first time in years.”
Amarnath explained to The Candle in the phone interview that an extraordinary event such as the pandemic state governments throughout the country are dealing with is an example of what the statute was meant to be used for.
“A disruption to municipal bond markets will have dire effects on the economy at a time when states need to be ready to fight the COVID-19 epidemic,” continue Amarnath and Feygin in the report.