The Fed should create a hurricane crisis facility

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Nathan Tankus is the director of research at The modern money network. He also writes Notes on crises the newsletter.

Hurricane Helene only dissipated on September 29, and Hurricane Milton – the first “Category 6” hurricane, a category that has not yet become widely accepted as a possibility – is due to land today. Rapid and substantial disaster relief will be essential.

However, budget struggles have left the Federal Emergency Management Agency with only the temporary funding they’ve already gone through due to Hurricane Helene (along with four other natural disasters that have occurred in just the last few weeks.) Put simply, the funding to respond to Milton is not currently in place, and House Speaker Mike Johnson says he will not call an emergency session of Congress to secure more FEMA funding.

Since Congress is set to reconvene after the election, that could mean a new FEMA appropriations bill could take a month or more to pass. Regardless of the final outcome in this particular situation, it is clearly far from ideal that responses to increasingly disastrous hurricanes live or die by the increasingly fickle vicissitudes of short-term congressional appropriations negotiations.

Enter the bond market. The Council of Development Financing Agencies is promoting the creation of a permanent category of “disaster recovery bonds” that would be exempt from federal taxes and could be issued when a state emergency is declared.

The idea is that a federal grant for disaster relief would be instantly available at the local level, rather than having to wait for federal dollars, which are often painfully delayed and inadequate. It would also be up to them, as the state government – ​​or a “political subdivision” such as a county – could decide the amount and timing of the bonds they issue.

Of course, municipal bond markets are notoriously illiquid precisely because of their reliance on complicated tax-exempt subsidies. Therefore, it is questionable whether additional reliance on tax exemptions is really the best approach to provide timely funding for disaster relief. Regardless of whether we do, the liquidity support would certainly make municipal issuers more confident.

If all of this sounds vaguely familiar, it should. The Federal Reserve created the Municipal Liquidity Facility in April 2020 to address the financial effects of Covid-19 on municipalities.

Despite various problems, including its onerous price tag, it sets a firm precedent for using the Federal Reserve’s 13(3) authority to borrow in “unusual and exigent circumstances” to support municipalities. If natural disasters aren’t “unusual and exigent circumstances,” nothing is.

What would such a program do? Provide direct loans to municipalities, as the Municipal Liquidity Facility did. Eligibility would, similar to CDFA’s proposal for permanent disaster relief bonds, be based on the declaration of a state-level emergency (or territorial equivalent). The facility should have uniform pricing and maximized maturities to make the most effective disaster responses.

Still panicking about inflation—and downside risk in general—it’s understandable that the Federal Reserve has not taken the initiative to get involved in disaster relief funding. But the Fed is not simply a financial market decision maker; is America’s preeminent macroeconomic government agency. And disaster-ravaged areas are also part of the economy.

It would be a dereliction of duty for the Fed not to get involved in making disaster financing easier. Whatever concerns there may be about the demand effects of ensuring timely and sufficient disaster financing must be weighed against the supply chain and productive capacity effects of allowing recovery efforts to be slower and less enough

Overall, this problem is likely to grow and increase in frequency and magnitude. Short-term considerations of the state of inflation should not define how the US central bank prepares for this. It should (if it has not already done so) develop contingency plans for a disaster liquidity facility.

If the Fed doesn’t want to get into disaster financing for fear of Congressional criticism, then it should open up such contingency plans to public debate. Let the National League of Cities, Development Finance Board agencies, local constituencies and the general public react. Permanent natural disaster bonds would clearly fit into such a liquidity facility proposal.

The Fed is, above all, concerned about its credibility and reputation. But being seen to be helping aid reach ordinary people when they need it most would boost his standing with the public. Acting only when bankers are in trouble is a reputational risk the Fed should not discount.