Federal Reserve Can Help Poverty-Stricken Cities Like Detroit

Editor’s Note: U.S. Rep. Rashida Tlaib  (D- Detroit) who represents Michigan’s 13thCongressional District is a member of the House Committee on Financial Services and the House Committee on Oversight and Reform. She is also a member of the Subcommittees on Consumer Protection and Financial Institutions, Housing, Community Development and Insurance, Oversight and Investigations, Economic and Consumer Policy and the Environment.  For submission inquiries contact Bankole Thompson,  editor-in-chief of The PuLSE Institute atinfo@thepulseinstitute.org

By Congresswoman Rashida Tlaib

In his first testimony before the House Financial Services Committee last week, Federal Reserve Chairman Jerome Powell did a disservice to the American people when he rejected the idea that the Federal Reserve Bank (the Fed) could help economically distressed cities like Detroit.

His reasoning? A misinterpretation of current law.

Chairman Powell stated incorrectly that the Fed did not have the authority to help municipalities that are drowning in municipal debt.

But they do.

According to Section 14 of the Federal Reserve Act, they are authorized to: 

“…buy and sell, at home or abroad, bonds and notes of the United States, bonds issued under the provisions of subsection (c) of section 4 of the Home Owners’ Loan Act of 1933, as amended, and having maturities from date of purchase of not exceeding six months…”

Let’s remember that during the Great Recession that began 13 years ago, the Fed bailed out big banks, including Fannie Mae and Freddie Mac, by cutting the interest rate it charged banks for lending them money to zero percent, as well as purchasing their long-term debt.

What the Fed neglected to do, though, was provide effectively targeted assistance to state and local governments most affected by the recession. As such, declines in state and local government employment due to fiscal losses during the recession were significant. So the Fed doesn’t just have the ability and authority to help cities like Detroit—which filed the largest bankruptcy of any municipality in history to the tune of an estimated $19 billion in 2013—it has the fiscal responsibility to do so.

While Chairman Powell said fulfilling that fiscal responsibility “is not a job for the Fed,” what he failed to note was that if he made the (correct and necessary) decision to help our cities in this way, it wouldn’t be the first time in history his agency has done so.

According to a 1933 Federal Reserve Board report, the Fed held $1,493,000 million in state and municipal local debt in the 1930s to stave off the dire straits the Great Depression put countless states and cities under.

At the height of the Great Depression, an estimated 15 million Americans were unemployed and left in financial ruin, many families could not afford coal to heat their homes, and many more couldn’t afford to put food on the table.

Thanks to the inaction of the Fed in 2008 on behalf of every day Americans, those living in cities like Detroit stood to face another Great Depression-like decline. 

State and local employment as a percentage of total population declined from almost 5.5% in 2008 to less than 5.1% in 2014. Had the Fed taken action to prevent that decline, 1.3 million jobs would have been saved during that period.

People living in cities like Detroit that experienced bankruptcy were threatened with pension cuts of up to 34%, health care benefit cuts by 90%, and their future cost of living adjustments were completely eliminated. In total, a staggering 32,000 people faced crippling pension and health care benefit cost cuts and retired workers lost a life-altering$7.8 billion in future payments. 

The bottom line is this could have been prevented and the financial well-being of countless Americans protected if the Fed had acted to help our cities and states in the same way it jumped to the aid of big banks and bigger corporations at the start of the Great Recession.

Sadly, under Chairman Powell’s leadership, the Fed hasn’t stopped handouts to big banks and corporations.

Just last September, the Fed readily lent a staggering $75 billion to banks and corporations operating in the repurchase market in which securities are leveraged to borrow money. And in case $75 billion was too paltry a figure, the Bank of America estimated that they’d hand out another $400 billion bailout this year.

Yet Chairman Powell would have us all believe the Fed couldn’t possibly wade into the bailing out of cities in dire need.

Yes, Mr. Powell, it can. Law grants the Fed the authority to intervene and help financially struggling cities. Precedent illustrates the Fed the authority to simply do just that. And, most importantly, justice for the countless Americans left behind during the Great Recession demands the Fed exercise that authority.

One comment

  1. Could well be that government as a whole should do more for the Detroits of this world, but that’s a political decision which just ain’t part of the Fed’s job. I’m not an expert on US law, but while the Fed may well have to power to buy municiple bonds as suggested in the above article, I doubt it is given any powers to buy bonds issued by cities which are clearly near bankruptcy.

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