15.4 C
New York
Sunday, April 18, 2021

Does the age-old question of forgiveness apply to credit card debt?

- Advertisement -
- Advertisement -

Could you forgive a debt if you could not pay it back? Is the age-old question finally about to be answered? According to a new rule issued by the Federal Reserve, it would appear so.

The good news — and the bad news — comes from the regional Fed branches, which each form their own Committee for Monetary Policy and Research. The latter is charged with providing economic commentary on the Fed’s plans and priorities. Since 2006, it has been working on several plans for how the Fed would approach additional quantitative easing, and on why interest rates had been held near zero for so long.

But even with that working group’s knowledge, the regional Fed branches ended up settling on their own, individual policies toward small-business lending — and the difference between what they recommended and what happened will surprise you.

The Fed’s Economic Policy Committee, which makes policy decisions for the entire Fed, generally takes the same view. But the regional Fed branches, whether fed by Cleveland, Kansas City or Atlanta, tend to interpret the Fed’s monetary policies somewhat differently than the rest of the country — and that ends up going into its decisions.

“We’re different than everyone else, and that’s a reflection of our different mandates,” said Peter Schiff, president of Euro Pacific Capital and a former Fed official himself. “We operate on a different vision.”

Thanks to a rule written in 1937, the Fed’s regional branches are allowed to do that. That’s because, under a number of rules, the Fed couldn’t set monetary policy for large numbers of borrowers. But for small businesses, it could.

Those loans, traditionally known as commercial paper, are small loans businesses make to themselves. (They are known as “thin-files” because there are not a lot of lenders who will want to hold their loans and the repayment is not as important as commercial loans are for large banks.)

In their proposal, the regional Fed branches argued that small business could take this extra-special Fed opportunity — which only has value during a financial crisis — and use it to get access to capital. But they argued in other ways, too. Small businesses had the same financial condition as large banks, they said, so a small bank should have the same right to seek loans as a big bank. Meanwhile, the regional Fed branches said, small-business debt should not hurt banks at all, if they buy the securities to service the loans, or if they make loans that can be owned by investors.

The regional Fed branches thought this move would help borrowers even more. They said small firms with weak credit might be encouraged to take out new loans rather than facing higher borrowing costs from a tight-fisted bank. And that would encourage banks to lend to them, further spurring the economy.

The big argument that banks made against this was that the idea was so risky that a small-business lender would have to buy a lot of securities that the Fed was just making cheap to hold on the balance sheet. Without enough such securities, a riskier, but potentially successful, loan would find itself at the mercy of investors and begin to lose value.

But the regional Fed branches also, they argued, went beyond the history of commercial paper — so they were bound to recognize what a great risk this would be. Moreover, they argued, they were better able to help banks pass the cost of their liquid assets along to small business, and that would allow them to pass through the cost of lending on to them directly.

Then came the bad news:

“The proposal as expressed has significant complexity and uncertainty,” the regional Fed branches said, and “does not deliver on the Fed’s statutory mandate.”

And that’s how it was, until the Federal Reserve finally announced its proposed rule, which was released on Friday. The Fed itself didn’t have a formal vote to approve the proposal.

Starting next month, the Fed will be providing an estimate of how many businesses and financial institutions will apply for this newly created exception — and how many will be approved.

The regional Fed branches and the Federal Reserve Board, which had been working together on the proposal for several years, will help craft the numbers. Will they be as confident in the regional Fed branches? I’m sure they will try. After all, they would have to try, as a group. In their hands it goes.

- Advertisement -

Latest news

Tesla driver was using Autopilot during fatal crash, official says

A car driven by a Tesla driver killed in a crash on Wednesday in California had the autopilot mode engaged, officials said.A video posted...
- Advertisement -

So Hard My Heart is Brown: A Rock Star’s Secret Battle with Addiction

“At first, I was using too much of my mind, trying to do too much with my life,” writes Charles Blow in his memoir...

CBS News through the years

At a time when so many traditional news outlets are in trouble — Fox News, local TV newscasts, newspapers, and local TV stations —...

Egyptian train hits bus, killing 11, injuring 43

See update at bottom of story (7 p.m. ET).CAIRO — A passenger train slammed into a bus at a station on Egypt’s western coast...

Related news

Tesla driver was using Autopilot during fatal crash, official says

A car driven by a Tesla driver killed in a crash on Wednesday in California had the autopilot mode engaged, officials said.A video posted...

So Hard My Heart is Brown: A Rock Star’s Secret Battle with Addiction

“At first, I was using too much of my mind, trying to do too much with my life,” writes Charles Blow in his memoir...

CBS News through the years

At a time when so many traditional news outlets are in trouble — Fox News, local TV newscasts, newspapers, and local TV stations —...

Egyptian train hits bus, killing 11, injuring 43

See update at bottom of story (7 p.m. ET).CAIRO — A passenger train slammed into a bus at a station on Egypt’s western coast...
- Advertisement -