Payment Protection Program Lending – Additional $250 Billion on the Way?

Photo by Dmitry Demidko on Unsplash

Two weeks ago I published a blog on the SBA’s new loan program, the Payment Protection Program (PPP) that outlined eligibility, how to apply, and funding mechanism. The CARES Act allotted $349 billion to this program initially, but it appears that this may not have been enough. We’re less than two weeks into the new program and there are already concerns that funding will dry up – leaving several small business owners without relief. In line with these concerns, Treasury Secretary Mnuchin announced on Tuesday, April 7th via Twitter that he had asked for an additional $250 billion in funding for the program. Though the request appears justified, there have been significant issues with the rollout of this program. The existing issues with PPP and initial reactions from legislators, banks, and news outlets to additional funding will be discussed below.

A Rocky Start

According to an article published by Reuters on April 6th, there have been a myriad of issues with the administration of the PPP thus far. One major issue stems from ETRAN – the portal used to submit PPP loan packages to the SBA for approval. Some banks reported that the system crashed on Monday for hours, leaving them unable to process applications. Moreover, in addition to the clunky interface, there has also been some confusion around what documentation is required for the SBA to issue an authorization which has been a pain point for lenders.

This has effectively created a log jam, resulting in tension between all relevant stakeholders. Lenders are frustrated with incomplete and conflicting guidance from the Treasury/SBA which prohibits them from processing applications efficiently, this is turn leads to frustration from borrowers who feel lenders have been unresponsive or restrictive (some banks have restricted access to PPP loans to existing clients). In fact, the implementation of the existing program has been so mired with issued that the Fed had to once again step in and offer a facility to banks to move the process along. Specifically, the Fed has agreed to provide “term financing backed by PPP loans” which is a fancy way of saying the Fed will purchase PPP loans originated by banks concerned about the costs associated with originating/servicing the loans.

The Rational for Additional Funding

Despite the lackluster rollout, demand for PPP funding is high and continues to grow. Many small business owners are concerned that funding will run out before they can get access to relief. This appears to be a sentiment shared by Senators McConnell and Rubio. The former issued a statement on April 7th stating “it is quickly becoming clear that Congress will need to provide more funding or this crucial program may run dry. Nearly 10 million Americans filed for unemployment in just the last two weeks. Congress needs to act with speed and total focus to provide more money for this uncontroversial bipartisan program. The latter tweeted on April 6th that “the fear that PPP will run out of money is creating tremendous anxiety among small business.”

In addition to concerns from legislators and small business owners, banks have weighed in to express concerns about the existing allocation for the program. Bank of America and Wells Fargo have reported a combined $42.6 billion in applications – more than 10% of the total allocation over the course of five days. This is an issue that goes beyond large corporate banks, several community banks have also expressed technical and logistical issues with the program so far, issues that are compounded by increasing demand from small business owners. Moreover, small businesses have started to complain about access to capital. Many lenders are backed up with thousands of applications and have started to decline new applicants, which will ultimately accelerate the need for additional funding or incentives for banks to process these loans – likely both.

Conclusion

Though more funding appears to be justified, it is my opinion that the real issues lie in the administration of the program. If lenders and the Treasury/SBA cannot get on the same page quickly, implementation of the program will be underwhelming. Despite the best efforts of Congress and the Fed, if the program is not accessible to Main Street than money will not flow to those who need it the most, this will in return result in a failure of the program. I believe efforts to provide additional funding to the initial PPP allocation should also include clear guidance from federal administrators to lenders to ensure the program can be implemented more efficiently moving forward.

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Fiscal Policy: Key Takeaways

This picture was sourced from Harold Mendoza on Unsplash

In a general sense, fiscal policy is designed to target the total level of spending, the total composition of spending, or both within the context of the national economy. Fiscal policy is carried out by the legislative branch of the U.S. government and achieves the aforementioned by changing levels of government spending and taxation. Fiscal policy approaches levels and composition of spending in two primary ways:

  • To increase demand and therefore economic growth, the government will introduce measures to cut taxes and increase spending (this results in a budget deficit).
  • To reduce demand and therefore decrease inflation, the government will increase tax rates and cut spending (this will reduce the existing deficit and can sometimes result in (1) a balanced budget or (2) a budget surplus).

Fiscal Policy

If the government reaches the conclusion that there is not enough business activity in the national economy, it can increase the amount of money it spends to spur growth (this is often referred to as a stimulus package). This spending activity most often takes the form of subsidies, tax credits, and infrastructure investments. If the government does not collect enough money in taxes, they can borrow money by issuing debt securities in the form of bonds (an especially popular funding mechanism at the municipal level). The process of governments issuing debt to finance initiatives is referred to as deficit spending.

Conversely, if the government decides to pull money out of the economy via tax hikes, they will slow business activities. This mechanism is typically employed to stymie inflation and can also be utilized to finance government projects or pay down existing deficits. However, it is important to keep in mind that governments are more likely to leverage fiscal policy to stimulate, rather than deter, economic growth. The use of fiscal policy to directly influence economic outcomes at the national level is one of the foundational elements of Keynesian economics.

When a government makes the decision to spend money or alter tax policies, it must be specific as to where money will be spent and what they will tax to finance the spending. In doing so, government fiscal policy has a significant amount of autonomy in regard to targeting specific communities, industries, investment projects, or commodities to encourage or discourage production. Though rooted in economic outcomes, the drivers for fiscal policy decisions are not entirely driven by economic factors. Political and social factors have played significant roles in influencing government spending regimes historically.

Conclusion

Ultimately, the name of the game for fiscal policy is targeting aggregate demand – the measurement of the total amount of demand for all goods and services produced in an economy. This is typically represented as the total amount of dollars exchanged for a set of goods or services at specific price during a specific period of time.

This is a doubled edged sword. On the one hand, companies in a targeted sector or set of sectors can experience enhanced revenues. On the other, if the economy is operating at or near full capacity, expansionary fiscal policy can ramp up inflation. Inflation, in turn, has the potential to diminish corporate margins in competitive industries. Moreover, inflation can have an adverse impact on those wed to a fixed income. The key takeaway here is that fiscal policy can have a profound impact on consumers – it can lead to increased or decreased employment outcomes while enhancing or diminishing purchasing power in the real economy.

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