America's pandemic safety net

America’s pandemic safety net

The U.S. will spend trillions to keep people and businesses afloat.

By Chris Canipe, Ally Levine and Howard Schneider

Published April 28, 2020

The U.S. Treasury Department and the Federal Reserve have set up roughly a dozen programs to keep people and businesses afloat during the coronavirus crisis, aimed at limiting bankruptcies, company failures, and family stress. The programs will funnel trillions of dollars to people and businesses left reeling as the economic consequences of the pandemic multiply.

The Treasury, the agency that collects taxes and pays the government’s bills, is responsible for the programs that are putting cash directly into the pockets of people and companies. The Federal Reserve is the nation’s central bank and an independent entity responsible for overseeing its money supply and financial markets. Its crisis programs help ensure people and companies, including banks and financial firms, continue to borrow and lend to each other, sometimes making those loans itself.

Here is how the Treasury- and Federal Reserve-backed aid breaks down:

The Treasury’s programs are meant to put cash in people’s pockets as wages dry up, or provide loans to small businesses that can be forgiven if they are used to keep workers on the payroll.

Qualifying individuals will receive a onetime check up to $1,200 for themselves, $500 per child and temporary supplemental unemployment benefits of $600 per week.

A $150 billion coronavirus relief fund is distributed to state and local governments based on population.

The Treasury set aside $25 billion for airlines, $4 billion for cargo carriers, and $17 billion for businesses considered critical to national security.

The Paycheck Protection Program provided $349 billion in loans to companies to keep people on their payrolls. The money is to be distributed by the Small Business Administration through banks for businesses with generally fewer than 500 employees.

The program ran out of money quickly in April. Another $310 billion was provided in a subsequent economic response bill along with $60 billion for small business “disaster” loans.

In general, the Federal Reserve does not lend to companies directly. Instead it uses and funds separate entities called Special Purpose Vehicles (SPVs) to spread credit throughout the economy. Each program differs. But typically if a bank makes, for example, 100 car loans, it can turn them over to the SPV and get the cash to make 100 more.

Main Street lending

The Federal Reserve will purchase up to 95% of loans that banks give to small and midsize businesses. Eligible companies must have fewer than 10,000 employees or under $2.5 billion in annual revenue. The Fed will buy up to $600 billion of loans to qualifying businesses.

Corporate credit

The Fed will purchase bonds and provide loans to qualifying companies, generally those with investment-grade credit ratings but also some “fallen angels” that have suffered recent downgrades.

Commercial paper

Short-term financing that companies use for payroll, inventory and other immediate needs.

Term-asset-backed securities

The Fed will buy securities that consist of batches of car loans, student loans, and other forms of consumer and commercial credit as a way to ensure banks continue lending to businesses and individuals for those purposes.

Municipal liquidity

The Fed will buy short-term notes from state and local governments to help them keep their bills paid at a time when tax revenue is falling.

Other federal programs

One of the Fed’s core purposes is to keep financial systems that function smoothly in normal times from grinding to a halt in a crisis.

That could be because of a traditional bank “run,” when depositors try to withdraw more cash than the bank has on hand, or because traders in key securities markets refuse to do business with each other.

In these cases it lends directly to banks and sometimes other financial institutions as a “last resort” source of cash when markets stop working normally.

Money Market Mutual Fund Liquidity Facility

Prime money market funds are important management tools for large companies and institutions because they are considered a low-risk place to park cash. But if confidence erodes, demand for withdrawals can spike. The Fed makes sure those demands can be met.

Primary Dealer Credit Facility (PDCF)

Restarts a program established after the 2008 financial crisis designed to provide overnight loans in exchange for eligible collateral.

The PDCF provides loans that settle the same business day and mature the following business day. The facility closed in 2010. The new PDCF offers loans with terms up to 90 days.

Quantitative Easing

Quantitative easing is when the central bank purchases longer-term securities from the open market in order to increase the supply of bank reserves and encourage lending. Its typical aim is to lower interest rates, but in this case Fed officials wanted to be sure the important global market for U.S. Treasury securities continues to function smoothly.

Discount Window

Banks that are unable to borrow from other banks in the fed funds market may borrow directly from the central bank’s discount window at the federal discount rate.

Swap Lines

The Fed has relationships with major foreign central banks to provide U.S. dollars in exchange for foreign currencies. It is also allowing other central banks to borrow dollars as long as they have U.S. Treasury securities to offer as collateral.

CORRECTION: A previous version of this graphic misidentified a Small Business Administration program meant to keep people employed. The program is called the Paycheck Protection Program, not the Payroll Protection Program.

Sources: CARES Act; Federal Reserve