The head of the Federal Reserve Bank of Minneapolis on Wednesday floated the idea of forgivable loans to small businesses, guaranteed by the government, to stem the tide of unemployment sweeping across a nation under lockdown because of the coronavirus pandemic.
More than 50,000 Minnesotans had requested unemployment benefits by Wednesday afternoon because their employers shut down to slow the virus. Social-distancing measures across the nation — shutting down restaurants, bars, theaters and salons — have put millions of people out of work.
In an interview Wednesday, Neel Kashkari, president of the Minneapolis Fed, said forgivable loans are an idea he’s “brainstorming with other policymakers in the U.S.” The purpose would be to give businesses enough assistance to keep workers employed without saddling the businesses with debt they cannot repay.
“I don’t think a loan helps that much because, if you don’t have any revenue, how are you going to pay that back?” Kashkari said. “At some point these loans are going to have to be forgivable.”
An idea he said is “interesting” is for the government to make loans to small businesses, perhaps equal to their last year’s revenue, and forgive them if they manage to maintain their workforce through the downturn.
“So you go to your local bank, get an interest-free loan up to one times your revenue, and the government will guarantee that loan, and it’s forgivable if you maintain your workforce for a few years,” Kashkari said. “That would be much more powerful than pushing everybody on to the unemployment rolls and then have them take years to find their way back to being employed.”
Initial jobless claims are expected to spike in a report due Thursday morning and policymakers are wrestling with how to prevent a job-market meltdown.
New York Times columnist Andrew Ross Sorkin suggested on Wednesday that the government offer bridge loans to businesses, repayable over five years, on condition that they maintain 90% of their workforce.
When people lose their jobs it can take years to return to the workforce, a phenomenon that played out in the aftermath of the 2008 recession. Kashkari, who worked for former Treasury Secretary Hank Paulson, was one of the key players in the government’s response to the financial crisis at that time.
“This is one idea that I’ve heard that sounds like it could be implemented at scale, and would create the right incentives,” Kashkari said.