While Senate Majority Leader Mitch McConnell says states should consider declaring bankruptcy, independent analysts are advocating that states set up their own banks to readily tap into newly created financial options to deal with the pandemic-induced economic crisis.

ELLEN BROWN, ellen at publicbankinginstitute.org, @ellenhbrown
ROBERT HOCKETT, rch37 at cornell.edu, @rch371
Brown is the chair and Hockett is an advisory board member of the Public Banking Institute, which Wednesday sent an open letter to state governors and treasurers: “How State Officials Can Save Main Street in the Face of COVID-19: Three Urgent Actions“.

The letter outlines three important new funding possibilities for states:

#1: “States can borrow from the Fed at 0.25 percent through state-owned public banks established by emergency executive order. According to banking experts, a public bank could be set up in a matter of a month if fast tracked by executive order, using a portion of the funds allocated to states under the CARES Act for capitalization. The bank could then borrow from the Fed at 0.25 percent to provide 10 times its capital in low-cost credit to communities. It could also work with community banks to fund loans for small and medium-sized businesses that are too small to qualify for the Fed’s new Main Street Lending Program.

#2: Use the Federal Reserve’s new Municipal Liquidity Facility (MLF) to sell bonds directly to the Fed. With this new MLF, states and cities can sell short-term notes of 24 months or less directly to the Fed without going through the private bond market, saving related fees. Hockett has proposed a game plan for how states can put this facility to immediate use.

#3: Get low interest loans under Federal Reserve Act 14(2)(b). This section of the Act already allows the Fed to buy six-month debt instruments from states and municipalities. Governors need to collaborate to urge the Fed to activate this section, lend to state and municipal governments on the same favorable terms banks are getting, and roll over the loans, as the Fed is now doing for financial institutions in the repo market.”

The group added: “As states and cities face a tsunami of emergency expenses, imploding tax revenues, and a shrinking bond market, the actions listed above can provide a real financial lifeline to struggling communities desperate for funds. Taking these steps and using emergency powers to establish publicly-owned state banks will not only help stave off crushing economic disaster for their constituents but will create an honest and efficient financial infrastructure that can keep communities productive and healthy long into the future.”

Brown said today: “The Federal Reserve has stepped up to the plate by relaxing some of its rules and dropping interest rates to zero, but only for banks. States could take advantage of this opportunity by having their own banks, something that could be done quickly by executive order. Newly created state banks could follow the example of Germany’s public bank KfW and grant one percent loans directly to Main Street businesses. Building a public bank network accountable to the public is a crucial part of the solution communities need.”