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U.S. Unemployment at Depression Levels, Fed Is at ‘Wall and Main’

April 9, 2020 (EIRNS)—The U.S. Labor Department announced today that new unemployment claims for the week ending April 8 were 6.6 million (at least; the previous two weeks have had to be revised upward). With revisions, just under 17 million people have filed for unemployment in three weeks, representing about 11% of the labor force, even with the inclusion of unincorporated self-employed (because they are now allowed to file for benefits). Since real April unemployment, including new labor force dropouts, was nearly 9% according to surveys taken more than three weeks ago, real unemployment now can be put in the range of 20%, close to pre-New Deal Great Depression levels. It is still estimated that this unemployment is overwhelmingly in services and in small businesses.

For businesses under 500 employees, the Treasury’s Payroll Retention loan program, aside from having a rocky start with many banks, has been quickly shown to be much too small at $359 billion. China’s similar program was twice as large, and still, huge numbers of small businesses there have not reopened.

Moreover, banks are pulling commercial and industrial credit lines. The column in Financial Times yesterday about JPMorgan Chase stopping any small business loan applications outside the Payroll Retention program, is but a hint of the volume of credit being called and credit lines being capped for large and small businesses alike, as the banks themselves are hit with margin calls on all their speculations. Commercial/industrial lending is now becoming like mortgage lending after the crash: Only Federally-backed loans go through.

The Federal Reserve this morning announced a $2.3 trillion “Main Street lending” program which continues the evolution of Fed lending toward the intersection of Wall and Main. Businesses of up to 10,000 employees and up to $2.5 billion annual revenue can receive loans from $600 billion of this, which is a special purpose vehicle (SPV) based on $75 billion from the Treasury in “equity and reserves.” This “company” size certainly includes a lot of Wall Street investment firms, but the revenue limit excludes major or regional banks or big private equity firms. The loans are to be made by banks and 5% discounted (95% purchased) by the Fed. The Treasury’s “equity and reserves” amount to owning the first-loss tranches of the SPV, which are certain to be losses with most businesses receiving the loans.

Another SPV uses $35 billion in Treasury “equity and reserves” to cover $800 billion in lending to states and larger counties and cities (the cover term “local government” is misleading). Note the much higher leverage ratio reflects the assumption that municipalities, for the most part, will repay the loans.

Much of the rest of the remaining $900 billion of the $2.3 trillion is the Fed taking over the guaranteeing of a large volume of the small business payroll retention loans from the Treasury. This will require more Congressional authorization, which is coming.

Finally, this is all in addition to the ongoing QE and liquidity programs trying to save the financial markets. Fed’s balance sheet tomorrow will probably show at least $6.5 trillion.

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