Power & Market

How Big Will These Federal Programs Get? No One Knows.

When was the last time the government delivered both on time and under budget? In the case of public bailouts, it seems every week brings more program expansions. We can only speculate as to how big the Main Street Lending Program (MSLP) and the Paycheck Protection Program (PPP) will be by the time we get out of the Great Lockdown.

Last Thursday, after reviewing 2,200 public comments regarding the MSLP, the Fed decided to lower the minimum loan amount from $1 million to $500,000, allowed lenders to retain a 15 percent rather than 5 percent share for certain loans, and increased eligibility to companies with an annual revenue of up to $5 billion instead of $2.5 billion. The $600 billion facility still has yet to open. But when it does, and if it gets fully funded, it will expand the Fed’s balance sheet by approximately 10 percent.

The PPP could also expand the balance sheet by this amount, considering that the program started at $349 billion and has already grown to $670 billion. The same day as the MSLP release, it was announced that the PPP would expand to work with smaller nonbanks such as those in the farm credit system and community development institutions. The April 27 to May 1 US Small Business Administration Report showed that in the second round of funding there were over 2 million applications approved for $175 billion. This means that there is still a couple hundred billion dollars left which should be exhausted shortly. Given the number of approvals for these forgivable loans, would anyone be surprised if the program were expanded for a third time?

We can only wonder. But as a CNN interview with Larry Kudlow revealed, the top economic advisor to the president said that they might consider getting additional money for the PPP since:

This has been an extremely popular and effective program, no question about it. You know, keeping folks on the payroll is so important….we will be looking at that.

The Fed’s most recent balance sheet update shows that only $19 billion from the PPP Liquidity Facility has been utilized thus far; therefore, we will continue to monitor this amount. Unfortunately, it could reach $600 billion in the months ahead. Both programs are unique because the public will be able to directly participate compared to other programs, in which most cannot, such as various Fed asset purchases, lending, and bond programs.

However, a third program might include Main Street as well. This too has been expanded as of last week: the $500 billion Municipal Lending Facility (MLF). The population requirements were lowered to accept cities with 250,000 residents (formerly 1 million) and counties with 500,000 residents (formerly 2 million). This may spawn more grant programs and other “investments” that could sweep the country and trickle down to members of the public.

Between the maximum capacity of these three programs, the Fed may contribute a $1.7 trillion increase to the money supply. How big the balance sheet will be by the time life returns to normal is anyone’s guess. Also keep in mind that the effect of the banks later pyramiding this money is rarely ever discussed. Nevertheless, all this debt raises another interesting question: How will we pay this money back?

The Wall Street Journal recently posed a similar question to St. Louis Fed president James Bullard. When asked about “the inevitable day of reckoning,” he replied:

We’re borrowing and we’re gonna have to pay that back in the future, so our future tax burden is that much higher. But can we handle it as a nation? I think we can.

Should we take the advice of one of the most respected central bankers in the country? After all, we’ve been told that it was the Fed that brought us out of the last financial crisis. Surely, they can do the same thing again, only this time on a much larger scale…

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