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'It's getting into territory that actually both the Treasury and the Fed haven’t been in before': Randall Kroszner on pandemic

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Randall Kroszner, Former Federal Reserve Governor and Deputy Dean & Professor of Economics at the University of Chicago Booth School of Business breaks down what’s next for the Fed and small businesses as the coronavirus outbreak continues to spread globally. He joins Yahoo Finance’s On The Move panel to discuss.

Video Transcript

ADAM SHAPIRO: And it helps that we have Randall Kroszner the Deputy Dean and Professor of Economics at the University of Chicago's Booth School of Business, as well as the fact that he's a Federal Reserve Governor-- he was a former Federal Reserve Governor. In fact, I was in your office for a one-on-one in late 2007, as we were going into the last financial crisis. And if you can unmute for us, Mr. Kroszner, would love to get your input on how difficult it is for the Fed and Treasury to get this Main Street lending facility up and running. It's unprecedented, right?

RANDALL KROSZNER: Yes, this is something really quite new. It's getting into territory that actually both the Treasury and the Fed haven't been in before, really trying to get into small business lending in a very granular way. I think the way that they apparently are going to do it, which is using some of the funding that the Treasury has from the CARES Act to capitalize the facility that will then allow the Fed to lend a multiple of that into this market. It could be very, very valuable.

JULIE HYMAN: Randall, it's Julie Hyman here. When you look at the roles of the different constituents here in the stimulus process-- and I'm talking about the Federal Reserve. I'm talking about the Small Business Administration. I'm talking about the banks themselves.

How equipped are they to deal with this? I mean, the banks in particular are coming under [INAUDIBLE] because the process to get those loans under the Paycheck Protection Program to individuals and businesses has been really rocky thus far.

RANDALL KROSZNER: Well, when you're trying to stand up a $350 billion program from nothing, it's a challenge. It ain't so easy to do it. And the small business lending-- the SBA, Small Business Administration, I think it only done on the order of like $30 billion worth of lending last year.

So 10-fold, trying to-- and then which was done over a year-- do that in a few days. There was going to be some bumps and glitches along the way. But they're starting to get money out. I think it's very wise that they're using the banks who have existing relationships with a lot of lenders for that. Those are the ones that are sort of easiest to start with.

And then ones that don't have the preexisting relationships, they're coming in. The key is getting the documentation standardized. And I think they've made strides on that. And so the money will start to flow more rapidly.

BRIAN CHEUNG: Hey, it's Brian Cheung here. So just to kind of loop back on the Main Street lending facility-- which will be separate from the PPP program, for those viewers who are may be confused about what those two things are. Given what we've learned about the PPP program logistically over the past few days, that despite trying to use the primary lenders, there are still problems. How do you think the Federal Reserve should be shaping, or how do you expect the Federal Reserve to shape that lending program to maybe more expeditiously get money into the hands of those that need it?

RANDALL KROSZNER: Yeah, I think there are different forms that it will take. They haven't exactly explained how they're going to do it. One way of doing it is try to provide the financing to the banks, make it easy for the banks to get money out more quickly, and to be able to deal with some of the regulatory capital requirements they may have.

For example, what they could do is start these loans, and then sell them into a facility that the Fed might have. We don't know exactly how they're going to do it. It's going to be a challenge.

Whenever you're trying to do lots and lots of small lending, it ain't easy. That's one of the reasons why we have so many small banks in the US, because they have those particular relationships that are not easy for the big banks or for others to simply just step in and do.

ADAM SHAPIRO: Randall, help us understand-- the PPP program, not Fed connected, but Treasury, it seems, is willing to take, for lack of a better term, a worthless or a below investment grade piece of paper and back it. The Fed really can't do that. It's got to have highly-rated securities.

So on the other end of all of this, everything that we knew going into this kind of crisis seems to be upended. I mean, you don't hear people talking about inflation because of the huge amount of money that's being brought onto the books at the Fed. What is the world going to look like after this?

RANDALL KROSZNER: I wish I had my crystal ball that I could tell you. I mean, this is not something that happens a lot. So we don't have a lot of certainty on that.

I think one of the challenges is that this may push the Fed to take more risk in the lending that they've done. As you mentioned, the Fed is supposed to only lend on good collateral to solvent institutions. But if they structure the program with the Treasury money, or the Treasury money is in the first-loss position, then the Fed can be protected from that.

As you said, it's very clear that-- Secretary Mnuchin has said they're going to be willing to take on loans that otherwise wouldn't be taken on. As many of these are going to be forgiven, they want to get the money out there-- money out there quickly. So this is sort of a brave new world for both the Fed and the Treasury.

ADAM SHAPIRO: All, right Randall Kroszner, who is not only Deputy Dean and Professor of Economics at University of Chicago's Booth School of Business, but also a former Governor from the Federal Reserve. And hopefully we can do a discussion with you when there's not a crisis. Good to see you.


ADAM SHAPIRO: All the best to you, sir.