Fed chief rejects Tlaib's push to lend to distressed cities like Detroit
Michigan's Democratic U.S. Rep. Rashida Tlaib challenged Federal Reserve Chairman Jerome Powell Tuesday to find a way the central bank could aid distressed local and state governments including Detroit.
During a House Financial Services Committee meeting Tuesday, the Detroit Democrat said federal law allows the Reserve System to buy municipal debt, but Powell said the reserve’s emergency lending facilities are limited to financial institutions.
Tlaib made note of Detroit, which emerged from a year and a half in bankruptcy at the end of 2014, and Puerto Rico, which has had a debt crisis for six years and this week reached a deal to settle $35 billion in debt.
“Do you not believe that the governments of Detroit and Puerto Rico also play a vital role that should be preserved even if financial crisis makes it hard for them to borrow money?” Tlaib asked.
“What I believe is that that’s not a job for the Fed,” Powell said. “The Fed has a particular role and particular authorities, and lending to state and local governments and supporting them when they’re in bankruptcy, that’s not part of our mandate.”
The Federal Reserve Board sets the country’s monetary policy to promote employment and stable prices. The agency also promotes “the safety and soundness of individual financial institutions.”
During the mortgage meltdown and Great Recession of 2007 through 2009, the Fed cut to near 0% its federal funds rate — the interest rate that banks charge other banks for lending them money. It also pursued novel policies of easing credit as well as buying mortgage-backed securities and the debt of three housing-related lending institutions — Fannie Mae, Freddie Mac and the Federal Home Loan banks.
If financial institutions are bailed out because they are vital to economy, why wouldn’t local and state governments be given the same courtesy, Tlaib asked during the hearing, noting the “devastating” effects the Detroit bankruptcy had on city government retirees.
Powell said the Fed has the ability to buy short-term obligations, but hasn’t done so since the 1970s.
Over the years, Reserve leaders have acknowledged it's “not appropriate for us in the sense that it's government finance,” Powell said. “That’s to be dealt with by fiscal authorities, rather than by the monetary authority.”
During the last recession, Presidents George W. Bush and Barack Obama loaned money to two Detroit automakers and their lending arms — which was mostly paid back. As Detroit entered bankruptcy protection in mid-2014, the Obama administration deployed staff and identified existing federal money that Detroit could tap — including aid made available for demolitions through the congressionally approved Troubled Asset Relief Program.
The state chipped in $195 million as part of the Grand Bargain, an $816 million package that included hundreds of millions of dollars from the philanthropy community to soften city pension cuts and prevent the Detroit Institute of Arts from selling off artwork.