The stock market fell again on Monday, despite the Federal Reserve announcing yet more measures to stabilize the credit markets and the economy. Wall Street is waiting for Republicans and Democrats on Capitol Hill to agree on a huge spending bill that will provide essential financial support for households, firms, and local governments affected by shutdowns related to the coronavirus. One of the major sticking points in the negotiations is how to assist large corporations that have seen their revenues collapse, such as airlines and hotels.
Memories of the Wall Street bailout of 2008–2009 are still fresh, and so this stalemate isn’t surprising. The original Senate Republican bill, which was released last Thursday, contained two hundred and eight billion dollars for corporate bailouts. By Sunday evening, when Mitch McConnell forced a vote on a new bill, the bailout figure had expanded to more than five hundred billion dollars, with this huge sum being apportioned to two separate proposals.
Under the first one, the Treasury Department, under Secretary Steven Mnuchin, would reportedly be given a budget of seventy-five billion dollars to provide loans to specific companies and industries. The second program would operate through the Fed. The Treasury Department would provide the central bank with four hundred and twenty-five billion dollars in capital, and the Fed would use this money as the basis of a mammoth lending program for firms of all shapes and sizes. “We can lever up to four trillion dollars to help everything from small business to big business get through the next ninety to one hundred and twenty days, to win this war,” Mnuchin said on Fox News, on Sunday.
Details of how these schemes would work are vague. Democrats said the new bill would give Mnuchin and the Fed total discretion about how the money would be distributed, with little transparency or oversight. They criticized the proposal as a “slush fund,” which Mnuchin and Donald Trump could use to bail out favored companies. News outlets reported that the federal government wouldn’t even have to identify the aid recipients for up to six months.
On Monday, Mnuchin pushed back, saying people had misunderstood how the Treasury-Fed partnership would work. He may have a point, but even in parts of the Fed there may not be much enthusiasm for his proposal. After it lent large sums to Bear Stearns and A.I.G. during 2008 and 2009, the Fed faced a lot of criticism. Judging by their actions so far in this crisis, the Fed chairman, Jerome Powell, and his colleagues would prefer to focus on stabilizing the credit markets by purchasing and underwriting baskets of financial assets, rather than lending to individual companies.
Unless we are willing to let troubled corporations collapse, which could accentuate the coming slump, we need a way to support them in a reasonable and transparent manner that minimizes the scope for political cronyism. Fortunately, history provides a template for how to conduct corporate bailouts in times of acute stress. Using the Depression-era Reconstruction Finance Corporation as a model, Congress should set up a Coronavirus Finance Corporation to help get us through the current crisis.
At the beginning of 1932, Herbert Hoover’s Administration set up the Reconstruction Finance Corporation, which is often referred to by the initials R.F.C., to provide assistance to stricken banks and railroads. A year later, the Administration of the newly elected Franklin Delano Roosevelt greatly expanded the R.F.C.’s scope. For the rest of the nineteen-thirties and throughout the Second World War, the institution provided vital financing for businesses, agricultural interests, public-works schemes, and disaster relief. “I think it was a great success—one that is often misunderstood or overlooked,” James S. Olson, a historian at Sam Houston State University, in Huntsville, Texas, told me. “It’s a good model. It slowed down the mindless liquidation of assets that was going on and which we see some of today.”
There were four keys to the R.F.C.’s success: independence, leverage, leadership, and equity. Established as a quasi-independent federal agency, it was overseen by a board of directors that consisted of the Treasury Secretary, the chairman of the Fed, the Farm Loan Commissioner, and four other people appointed by the President. “Under Hoover, the majority were Republicans, and under Roosevelt the majority were Democrats,” Olson, who is the author of a detailed history of the Reconstruction Finance Corporation, said. “But, even then, you still had people of opposite political affiliations who were forced to interact and coöperate every day.”
The fact that the R.F.C. operated at arm’s length from the Treasury and the White House gave it credibility, and the bipartisan nature of its board won it support on Capitol Hill. Congress originally endowed it with a capital base of five hundred million dollars that it was empowered to leverage, or multiply, by issuing bonds and other securities of its own. If we set up a Coronavirus Finance Corporation, it could do the same thing without directly involving the Fed, although the central bank might well end up buying some of its bonds.
Initially, the R.F.C. didn’t publicly announce which businesses it was lending to, which led to charges of cronyism. In the summer of 1932, more transparency was introduced, and when F.D.R. entered the White House he found a competent and public-minded person to run the agency: Jesse H. Jones, an entrepreneur and philanthropist from Texas. Jones was a Democrat, but he was best known as a business visionary who built the Houston Ship Channel, which transformed the city’s economy, and the owner of the Houston Chronicle. He had only an eighth-grade education, and he proved to be an extremely able and energetic administrator. Olson told me he regards Jones as “one of the great unsung heroes of the Great Depression.”
In March, 1933, with the banking system seemingly on the verge of collapse, the R.F.C. played a key role in stabilizing things. Roosevelt announced a bank holiday, during which Congress passed the Emergency Banking Act, which empowered the R.F.C. to purchase preferred stock in banks that desperately needed finance. The switch from loans to equity gave taxpayers a stake in the enterprises they were bailing out, and it also gave the banks more time to recover, because there was no fixed date for repayment. Together with the subsequent introduction of bank-deposit insurance, which was part of a separate banking act, the R.F.C. stopped the panic and restored confidence in the system. “All you have to do is look at the number of bank failures,” Olson noted. “Before March, 1933, it was in the hundreds, and it went down to the tens.”
With good will on both sides, there is no reason that Congress couldn’t act upon these lessons. Distancing the administration of the bailouts from the White House and the Treasury Department would alleviate concerns about corruption. Providing assistance in the form of equity, rather than loans, would give the taxpayer a stake in the success of the scheme. (Last week, Trump himself said that he supports this idea.) It might be difficult to find a successor to Jones—someone whom both parties regard as an honest and independent-minded patriot—to run the new agency, but it shouldn’t be impossible. (Step forward, Warren Buffett? Or a younger version of him?) The important thing is to move quickly and create a transparent bailout framework that could operate at scale and maintain public support. A Coronavirus Finance Corporation could be the answer.
A Guide to the Coronavirus
- How to practice social distancing, from responding to a sick housemate to the pros and cons of ordering food.
- How people cope and create new customs amid a pandemic.
- What it means to contain and mitigate the coronavirus outbreak.
- How much of the world is likely to be quarantined?
