How To Stop The Fiscal Emergency Facing U.S. Cities And States

like twenty more to come. I said the major strains in the financial system. I caveated it. You can't say that there are forty major financial strains, but you're going to I think I think they're white. I think that

might literally be already more major ones. But nonetheless, we definitely have not hit all the major ones, and so I think that today's episode will be one that I think sort of unquestionably counts as major even if you know the number of remaining ones are still TPD alright, fair enough, and I think I know which one it is. It has to be the UNI market, right, Yeah, so

absolutely so. Due to the nature of the crisis that we're seeing we have a situation in which a lot of the costs, particularly on the public health side, are falling on state and local authorities. At the same time, their tax revenue is rapidly drying up because there's so little economic activity going on within these state and local taxing authorities. And so what is a major employer of many people all in a major source of economic stability.

They're all simultaneously running into rapid budget problems. And we've already seen just in the early days, major wave of cuts, layoffs, and so forth from cities, towns, and states around the country. Yeah, and I think from a market's perspective, I remember seeing a couple of headlines that basically said we didn't have any new issuance new muni bond issuance in March, and we had a bunch of outflows, I think, the most outflows on record from muni bond funds. So really we

have this big investor exodus. And as you point out, if tax receipts are expected to fall and at the same time states can't issue as easily as they once could in the muni bond market, then that all adds up to a pretty big financing crunch at exactly the time where you wouldn't want to get that right is a financing crunch, and then that leads to an economic crunch, because you know, we saw during two thousand and eight

two thousand nine financing constrained municipal authorities. They had to cut a lot of spending for the same reasons as now, and it's them years and years to recover that law of spending. And so you know, when we think about the sort of longer term ramifications of this and the damage that these last several weeks will do to the economy potentially for years to come, state and local finances

is a huge problem that we're facing. Yeah, and I have to say, the only thing I really remember from the muni market is Meredith Whitney making that big call many many years ago. Do you remember that where she predicted a bunch of defaults, I think hundreds of defaults across the muni space, And of course that didn't come to pass. So I'm really interested in in returning to this topic. It's been a while. Yeah, the default didn't happen, It was more just played out on the real economic

side and a slow return to hiring. So anyway, on today's episode, we're going to dive into the state, the state of state and local municipal finance, how much strain there on, what are the ramifications of a strain, and what can possibly be done to alleviate that pressure. And

today we have three guests. This is a first time we've ever had this on the podcast where we've had three guests at once, so it could get a little crazy, but all three of them have been doing a lot of writing about this crisis and how it can be addressed from the sort of federal reserve side of what the Fed can do to help ease the problem, and

what the Treasury can do. So I'm going to introduce our three guests today are Skanda Amarnav, director of Research and Analysis and employee America, Alex Williams, he's a grad student at the Levy Institute, and Yakov Fagan, he's an associate director of the Future of Capitalism Program at the Burgrowing Institute. I want to thank them all so, Sconda, thank you for joining us, Thanks sharing me on, Alex, appreciate you coming here, thanks for having me, and uh Yakov,

thank you, thank you too. I want to introduce all three of you so that people could recognize your voices in advance. So, uh, to get started, Asconda, I'll start with you. Just talk to us a little bit about what we've seen so far from your perspective. Your talk to us about what you do with Employee America and how the initial wave of financing stress that we've already seen at the state and local level is sort of

playing out in the economy. Sure, so employ America organization is focused on a combination of tighter labor markets sustainably, and to get there, obviously it requires fighting recessions aggressively and mitigating their costs. The costs of recessions aren't even just seen in recessions or the official and be our dates UM, especially when you think about like the weakness of the proprior business expansion, you think about the growth

and the weakness in UM getting unemployment down. So we had high on the ployment for about three years and that was in large higher nine three years. I was longer than that, but we had state and local austerity UM that was helped sort of keep growth low and

to keep unemployment high for a lot longer. And what we're seeing now is state and legal government's already starting to announce a lot of job cuts similar to what we saw around two thousand nine, and part of that right now, it's these are not fully in motion just yet because states built up um rainy day funds over the past expansion and they're now running them down. But it's not gonna last that much longer just because of

the scale of the shock. So you have states that are saved a lot, saved up a lot, didn't really spend much during the past expansion, but are still in a pretty fragile position in terms of being able to manage this shock because they are budget constrained, as you mentioned, and I think and it's just that they're not able to sort of finance their way through it the way

the U. S. Treasury and the federal government can. So I have a dumb question, and this is partly because I'm outside of the US at the moment and I haven't been following a lot of these dynamics as closely as you all have. But there seems to be an assumption here that state governments are on the front line of the coronavirus pandemic as well as the economic fallout. Why is that the case? Should states actually be the first line of defense and what's the role of the

federal government here? So so part of this is a sort of the vestiges of a more federalist system in the past. So a lot of administration still ends up occurring at the state local level, even though the financial levers are still controlled in d C. So there's some there's a bit of a mismatch there that that's going on.

But UM, should more of that be done at that be centralized, I think for a lot of these types of coordination and collective action problems as we see it, sort of procuring the necessary equipment and those are all

things that should clearly be centralized in some way. But the reality of this is just that there's a lot of safety net programs public services UM that are typically in higher demand during a crisis like this in terms of the public health crisis and the economic crisis, and those are still connected at the state, state government level, the local government level, and yet they don't really have

the flexibility precisely when you need it UM. So that's kind of what and so it ends up being collateral damage in the process is there's a lot of UM cuts to UM Andrew Cuomo had mentioned, had announced very recently the Governor of New York cuts to medicaid, um hiring freezes, plans for big expensure cutbacks in the coming year. So you've already started to see a lot of these announcements come out um that they're going to have to take an act to other types of economic activity a

public sector performs. Yeah, I just want to add in that. You know, yes, it might be better that certain things are centralized, but this is the system we live in with the United States, and there are some advantages to governmental redundancy, especially in a world in which regional cycles are very disconnected in the United States between various regions

and are driven by global shocks more generally. But a particularly perverse sort of aspect of the way that it's set up now is is Scanta mentioned, you know, cuts to Medicare and custom Medicaid right now, These programs at the federal level are actually set up to be mechanically pro cyclical at this point, where if a state government cuts its Medicare funding or its Medicaid funding, those are

funded at the federal level through matching grants. So every dollar that they cut due to lost tax revenue or excess take up in other spending programs loses them an additional dollar of federal spending on those programs, which is like, there are lots of these sorts of little things, you know in this system of distributing, you know, federal abilities to state levels that you know have these sorts of

perverse outcomes. So yeah, I want to go back to what you were just saying about the sort of governmental redundancy and the appeal of that. Like, we have this federal system of states have a lot of autonomy, cities have various authorities. We have it's a very it's not like other countries where maybe it's sort of all run down by one sort of centralized chain of command. That's our political system. What in a crisis like this, what

do you see as the sort of advantages versus disadvantages? Well, I think we all know about the disadvantage, and I do think kind of from my point of view, it's still more disadvantage than advantage. But on the other hand, we when we've seen that the federal government, for whatever reason you attribute to it, hasn't been very swift in

respond to this. But you've also seen that some of the states, particularly you know, especially up in Washington here in California, have been much faster at responding to this than the federal government. And you know, God, you know, God help us. If they hadn't been right, it could have been much much worse. So there is always some

advantages to redundancy. But one one of the problems that I point out in the in the working paper that I put out though, is that the last sort a couple of months, you know, because of that governmental redundancy, the problem is is that there's redundancy in you know, ability to execute policy, but not inability to provide financing.

So you have the situation where you know, these states know that if they enact these broad lockdowns like that's going to you know, essentially wreck their finances and so all of you know, one way of looking at basically what happened through January, February and March is that you basically had a whole bunch of these different state governments effectively playing chicken, where the you know, sooner they locked things down, the sooner they'd lose revenue and the less

money they'd have to treat the aftermath. But the later they waited, they had more revenue, they'd have, but the worse of an outbreak they'd have. So it's this kind of you know, sort of distributed game of chicken. Because of this non integration of you know, budgetary and political abilities, it's a perverse incentive system for dealing with something like

a pandemic. But since you mentioned that working paper, maybe we should talk a little bit about what you think would actually start to solve the problem of UM this sort of financing crunch in the muni market or in the state financial system. So I'm gonna let Yakov and Scanada talk about the community market because they, you know, are done more of the work there. But the proposal that I put forward basically looks at the fact that UM states have a you know, states tax revenue elasticity

with respect to GDP. So basically, how much the state tax revenues grow as GDP grows is just around one or just a little bit below one in the long term, so states face a shrinking tax base, you know, long term without raising tax rates. But at the same time, in the short run, they have a very high elasticity with respect to unemployment. So if you know, unemployment falls by one point, you know, tax revenues will fall by

one point five points or one point eight points. And so what I sort of did with this thesis was to come up with a sort of you know, you guys have had Claudia Sama on talking about the Som rule for recessions and for getting money out uh, and essentially, you know, state governments are subject to these same constraints because their balanced budget constrained entities. So the idea was essentially to take that and then move it over to

the space of tax revenue replacement per unit unemployment. And so the idea was that it would create sort of an autonomous financing facility that didn't require you know, specific legislative discursements, that would support state revenues during a downturn that generally is you know, not caused by anything that happened in the states. The states, you know, are subject to regional and national and global trends much of the movement, and state level unemployment is not caused by state level

policy per se. And so the idea behind this proposal would be that you know, for every you know, when you have something like the SOMB rules, so if unemployment goes up half a percentage point, over its three month

moving average. Anytime that is triggered, it looks at that like it looks at the past a year or so of unemployment and takes that as a baseline, and for every percentage point that unemployment goes above uh that baseline rate, this facility would essentially transfer eight percent of the previous year's tax receipts like for that period to that state as a block grant um for the states to basically

use for general revenue. Part of this is because states historically, when they are trying to close budget gaps, have you know, undertaken sort of more aggressive financing maneuvers, things like securitization of future revenues or things like privatization of existing services. But when you're in a financial crisis, or when you're in a crisis that has financial dimensions, even that sort of really aggressive dealmaking basically becomes impossible and you just

need something in order to stop the bleeding basically. And so a big blanket policy like this that gives states wide latitude to deal with the causes of the crisis, I think would go a long way towards remedying the sort of perverse incentive system. Well, why don't we talk about from more of the market side. I mentioned that we've seen record outflows from a bunch of muni bond funds. We've seen strings in the market. I think almost no

new issuance in the month of March. What would help there, Well, Scanda and I argue that what would really help there would be of the Federal Reserve intervene much it does in other markets and backstop the market and purchase some municipal bonds. I just just attack on there. At Yakoff's point, UM, we've seen already that they've been willing to engage in direct purchases for UM investment grade corporate funds, including buying

the l q D E t f UM. So I think in this situation, given the sort of public interest need alongside UM, the AH the same sort of budget constraint financial constraint problem that sort of emerges in these types of crises, UH direct purchases of investment grade UM state and local government debt. It's a little harder because the market is more fragmented, but it's something that we I think at least at an additional degree of freedom to the more comprehensive fiscal solution that Alex is proposing

in his working paper. So let's let me ask you further about that scondin then others can take it, because intuitively, it's okay, the FED, in theory, could buy municipal debt directly or the secondary market from the states or the towns to backstop their finances, and technically from a um from a mechanical standpoint, it's clear how the FED could

do that because it creates money. On the other hand, there are obvious concerns about sort of democratic accountability that sort of reminds me of in Europe when they're like, well, if we just started back stopping all the debt from the different countries, then what is to limit their spending going forward? And things like that, and so the you know, Draggy and the Eurozone crisis proposed proposed that thing. We're like, okay, you can get back stopping from the ECB, but you

have to submit to certain conditions regarding your spending. How should the FED navigate that issue now such that it can backstop state and local authorities without necessarily UM writing them a blank check? I think so one of the parameters to the proposal Yakov and I had put together a few weeks ago, was to make it sort of

time dependent. I think there were aspects of the as of the drug EASA UM yes M proposal in one sense that helped make sure there was access to financing, but there was also sort of the pitfall that it also encouraged a lot of austerity that we can which is the exact opposite of which is, yeah, the exactly opposite if we anter something about the big picture UM problem that we really don't want to UM to exacerbated.

Aside from sort of the pro pro cyclical aspect of st local government spending is we want these governments to spend what's necessary for the public health response, not to sort of meet arbitrary budget constraint that could be loosened with the right policies in place of the Federal Reserve of the federal government. So in this case, I don't think that the answer is to sort of make them

commit to some austerity policy for the receivable future. What should be this should be constrained in our proposal is make it sort of the timeline should be consistent with

the national crisis. Right that these is uh like the FEDS ability to effectively lend to state governments should be something that's available for a limited time, right, So, just as the commercial paper funding facility and two thousands, eight and nine was actually was open till February UM, so the really book ended the worst parts of the financial crisis and gave some time for corporations to roll over short term debt until we had gotten through the coverst

period of the global financial crisis in the Great Recession. Something similar could be calibrated here in terms of making financing available to the state governments. For we call it approximately twelve months from the worst point in terms of

the economic impact from this crisis. So we could take the peak on employment rate, or we could take um some other economic parameter or public health parameter, or even I think one of the things that's also missed in these in these discussions about you know, moral hazards for providing financing facilities for subnational entities in the US is the fact that in the Eurozone, these balanced budget requirements

are centralized and centrally enforced. They are they are the monstric treaty saying you know, this is the space that your budgets are allowed to be in. UH in the States, in the us. By contrast, they are entirely enforced and acceded to at the local level. There are aspects of

the state constitutions rather than anything in federal law. So you wind up having this situation where, um, on the one hand, the states are saying, yes, we are doing this on purpose, you know, and there's been studies showing that this affects muni bond yields in those states, you know, in this way and that way. Um, But it's the

states saying that they're going to do it. But then the states also putting themselves in a position basically where it's impossible for them to sue basically like an anti correlated capital structure, So there's no way they can set their sort of financial house so that their financing costs get lower when there's a crisis. Because the financing costs

are done, they're displaced entirely to basically capital accounts. Because these states with balanced budgets that only obtains for the general revenue account, anything that they do to sort of like build infrastructure or do a wide variety of other things, they can essentially move off budget in a way that like you see, you saw that we talked about the mundy blow ups that didn't happen. But one of the things that did happen is there were a lot of

off budget enterprises that did blow up. The Detroit Water Authority was a very big one that went on for a long time because they had a complicated UH swaps portfolio. But states, you know, progressively do that when they securitize or when they privatize their revenues in order to make up for shortfalls in their general revenue account in a given period. They do it by pushing things into these capital accounts and into these off budget enterprises that are

themselves fragile but which operate in the muni markets. So backstopping those muni markets does provide a kind of secret quasi backstop for you know, state's attempts to relieve themselves of their self imposed burden, which is sort of a different overall environment from the Eurozone of member states trying to deviate and spend more. Yeah, it could just quickly

tack onto what Alex was saying here. Um, so there are balanced budget laws and rules, but as he's just pointed out, for each state, there are exemptions in various ways in terms of how to adhere or not adhere

as much to them. Um And I think that sometimes it gets lost in this discussion because there's an assumption that there is a law and it is airtight, and that these states have to just start slashing spending as soon as tax revenue falls, and there are ways to um manage and maneuver around it that we're probably less there was probably less political willingness to explore them in the early tens in a way that I think now just because of the nature of this, should be explored

more aggressively. There's also exemptions for certain types of natural disasters, exemptions through different types of what they are called the special districts that allow for certain types of certain parts of the state government to issue debt and not be constrained by these sort of arbitrary balanced budget laws and rules. M I'm curious, but why did the FED not buy muni debt back in the financial crisis of two thousand eight.

Was it the sort of moral hazard issues that you're all alluding to, or was it something more technical, or was it just that the crisis didn't really warrant the kind of state response that we need now during a pandemic. I think I can take that. Um. I think there are a variety of reasons. Uh. In Ben Bernacki's memoirs, it's noted that two of the vice chairs, and I will tell you who they are in a second, because

I have them written down. UM, I think it was it was David Cohen and Kevin Walsh who were most skeptical of the proposals. And my understanding and instinct is there were several things involved. First of all, the FED isn't really familiar with the municipal bond market, and the municipal bomb market itself isn't a very deep market. Um. They're all kind of which is very unfortunate and one of the reasons I do think the FED should be boxed stopping this market and working with it, because because

it just needs to be fixed. Overall, I think there was another reason in which it did seem like it would be the FED doing fiscal policy, which at the time I think there was still a lot of nervousness about where building that divide. And the third reason is, and I think this is still a reason hasn't happened today, is quite frankly, neither the state treasurers nor the Federal

Reserve board really under stand what each is doing. It's very likely that one of the reasons we don't see this is if it does assume states can't borrow because of balance budget laws. Because and because of those laws, what you see is the collateral base of the municipal bond market is extremely hard to understand, even for people

who are very, very seasoned investors in that market. In California, we're actual I'm actually doing an exercise that with the Californias some people in the California state government looking at what could be receivable, and it turns out there might be a hundred billion of at least of things that we could re uh, we could refinance through that FED

potential FED window. But it just doesn't look like it's attached to California because it's all done through these you know, these special districts to get around the prop their team barrier and the barrier of the balanced budget country. But it doesn't mean it's not out there. It just you need to know where you look. Let's just talk a little bit more about you know, we're talking about these sort of like constraints in the law that states have.

They have different ways of getting around them. Or even theoretically a state or a city could call a special session of the legislature and change the laws if they have If they have them in the law, that's up to them. What would be in the in your view, and maybe um ascanda could start with you, but others join in, what would be sort of the ideal instrument here for the FED, because you know, as you all

of you pointed out, there's numerous different ones. There's water authorities and transit authorities, and so it's extremely complicated mosaic of different issuing authorities and states in times, what would be the ideal instrument for the FED to announce that it would be willing to buy either primarily or secondarily, which then the it could be left up to the states or cities themselves too for about how they can

issue under their existing law. Yeah, so in the ideal state, the US state local government debt market looks a little bit more like Canada's, I would say, in the sense that Canada issues what are effectively um Canadian provinces issue effectively general obligation debt, right, so it's backed by the taxation authority and it's all pretty um uniform and standardized and actually the Canadian provincial debt market, well, I don't know how much is actually I've had a trouble finding

a lot of written product on this, but actually it's a very deep market and it's actually pretty sophisticated market relative to call it the US um UNI debt market, which is very fragmented, and there's a big difference between the revenue back bonds and uh general obligation debt. So it would be ideal if there was a deep market.

The absence of that probably means that what would be this sort of second best solution, I think, is sort of direct loans that the FED makes to UM probably states in large cities that are of investment grade UM, so you obviously do there's the FED has certain quality justifiable qualms about engaging too much credit risk, so at least keeping it to sort of the same parameters that

kept for corporates. And then to some extent, if you if you just at every single state and local government entity that existed, it would obviously be a little bit hard to manage administratively. So I think it's just a starting point. Um, if state governments were willing to accept

loans from the federal from the federal reserve. I think that's the kind of thing that should be encouraged in some ways and actually can This could be a chance to really catalyze some standardization and some ability for state governments to think a little bit more expansively about how to get the necessary financial flexibility in a crisis, which

right now, um, they sorely lack. One of the problems with this idea that that a few people have pointed out is the notion of the FED actually coordinating this action with fifty state governments. How would you suggest they go about doing in that? So it is a regionalized federal reserve system to right there, twelve federal reserve banks, and they all have pretty close relationships across um their regions. I mean they they take a lot of pride in

it um. So I don't actually think that I think fifty states is um compared to sort of like the scale of what they're they've been doing in other markets. It's not actually like insurmountable. You think about twelve federal reserve presidents, You've got um, twelve regional FED presidents that

can help lead those efforts. They have a lot on their plate, obviously, but it's not the kind of thing that I think that's probably more manageable than trying to go about this through I mean, I think I think it's just a starting point that they obviously cann do secondary market purchases of municipal debt, and I hope they

at least start with that. But I think as far as actually kind of giving state governments the appropriated fintange flexibility and working with state treasures, fifty state treasurers, twelve regional fed banks is not something I think that's actually a logistically challenging as opposed to trying to do it with every single city and county and township. That's probably

too much. It's also it's also worth noting that a like large proportion of local government revenues are actually inter governmental transfers from the state level, and this is one of the first things that goes in a crisis. When states start to face a budget crunches, they cut their

you know, offerings to local governments. And part of the reason for this is that local governments have a large part of their like own source revenue drawn from property tax, which is actually comparatively inflexible to the overall you know, sort of employment picture at a given time, because property tax assessments, you know, come every know, a couple of years or whatever, and so your problem is not that, you know, income goes down and receipts immediately go down.

It's that income goes down and delinquency goes up a little bit in those situations. So there's a kind of you know, every man for themselves to these inter governmental transfers in a crisis um. And so if we backstop these fifty states, there's sort of an existing administrative framework for those fifty states to then in turn back stop their own sort of local governments. And even within the states, there's all the there's this perception that there's this jigsaw

puzzle of special districts. But in a lot of states, as we've surveyed and looked at a lot of them, actually there is the fiction that all of these things are being coordinated through the Treasury Department, through the Treasuries or some kind of special body that coordinates the district and has all the districts and has all the information on them. So we've been talking a lot about moral hazard and perceptions of how this will work. And I guess one of the things I was wondering about is

the muni market. Themuni bond market is kind of a special one. It comes with all these tax benefits, and I'm thinking of how to phrase this question, but I guess I guess I'm wondering about the moral hazard when it comes to bailing out investors or effectively bailing out investors in muni debt. Like these are people who probably do have a lot of assets who are probably investing

in muni bonds because they're worried about taxes. Does that make this move more politically sensitive than it would be otherwise? I think the sort of the sort of h qualms

about asset purchases and who they benefit. I think that means if it's a valid point to bring up in the sense that the people who own these assets and who will probably benefit from uh loosening financial conditions and more broadly tend to be on the wealthy end of the spectrum, I'm not sure it's necessarily disproportionate for um

muni market. Obviously, there's a tax exemption within. If you're a California investor in California debt, I mean you have the tax exemption, full tax exemption there um as opposed to you can't. Actually is a very weird thing because it actually narrows the investor based in some ways, because if you're in New York investor in California debt, you don't really get any real benefit there. It's a tax exception.

So UM it tends to lead to be certain narrow investor bases, and it's UM, I I appreciate the point, but also it's it's also one of these things that we're doing this in corporate bonds, We've done this in other asset classes. I'm not sure if you think about like who owns munies versus who owns most financial assets, I think that that skew tends to be the same.

If anything, it's probably more likely to be skewed for asset classes that are U have a truly global investor investor base, as opposed to if you're buying Idaho bonds and you're an Idaho investor. There's at least some sort of these are pretty narrow investor bases itself. But yes, there is some distortion there to UM acknowledge, and the distortion goes both ways, right, Because one of the reasons it's not a great market is because most of the

reason you buy municipal bonds is tax exemption. So you have very very liquid markets, you have very shallow markets, and these are the markets that since n have funded

all infrastructure investment in this country. So it's I think it's less of a moral hazard problem than the underlying market structure not being very stable, and I do, and I think the advantage of moving this program along is to get some standardization and to get some thinking and information on how to fix these markets in the long run, if I could turn around the moral hazard point um as well, the fact that the overwhelming majority of this

infrastructure is funded in these municipal bond markets is itself a kind of moral hazard question of the federal government displacing its responsibility to fund state level infrastructure projects onto these municipal bond markets by forcing states to create these

off budget enterprises in order to do necessary investment. There is a good graph going around showing that basically net investment at the state level, sort of in fixed capital formation, has been you know, net net plus or minus, you know, zero point one five percent of zero. Since it's like really been kind of abandoned in that way. And so these moral hazard questions of oh, what if these local places spend too much money and then distribute that the

cost to everybody else. In practice is actually inverted, where the the refusal to fund state infrastructure projects at the federal level, and also the progressive increase in unfunded mandates put by the federal level on the state level essentially create a moral hazard problem of the federal level, which does not need taxes in order to fund it spending essentially absorbing the tax basis of these state level governments.

Before we wrap up, just real quickly and anyone can take this, what are the consequences economically if we were to see a sort of wave of austerity from state and local authorities on top of this that largely went unchecked. So we have something in the Carre's Act, there's some money going to stay locals, but maybe they'll do a little bit more. How bad could it compound the problem of recovering if there's not something sort of done imminently

to to address this crisis. In terms of how long it takes us to get back to pre crisis level, we saw after two thousand eight that it took until for a fair number it states to recover trend growth

and tax revenues. Uh, and if we've seen from other data that the immediate demand drop off has been so much steeper than it was in two thousand eight, and so much more tied to basically things that takes place in you know, physical space, you know, use of use of public services, use of retail, brick and mortar, use of all of these things that generate tax revenues. So I mean, just going from that baseline, I mean, it's it seems like a disaster if further relief is not forthcoming.

All right, Well, uh, thanks to all three of you for joining us. Really appreciate all your perspective. Not something that we've discussed much on the podcast before. So Skanda, Alex and Yakov, thanks for joining outline. Thanks so much, thanks for having us. Yeah, thanks, thanks Tracy. I really

liked that conversation. I really liked you know, all the allusions to the Eurozone crisis are like coming back to this crisis, except in reverse, because of course, that was essentially the problem in the Eurozone posts the Great Financial Crisis, which is that you had all these authorities, they didn't print their own money because none of them have their

own central bank. They were all credit constrained, they're all forced into austerity, and it's like that's like, it's this weird US parallel we're facing, where this time the question is how much domestic US austerity will we see because none of these entities currently have access to a sort of either blame check funding from the central Bank or the ability to conduct their own countercyclical fiscal policy. Yeah.

I'm also getting terrible target to flashbacks where everyone was sort of arguing about whether or not that liquidity support from the e c B amounted to a stealth bailout of certain Eurozone members. Uh. Those were fun times. But I do think this this idea of mixing fiscal policy um with monetary policy, or having a monetary policy authority step in to allow fiscal stimulus to happen through the states, I think that's really interesting and it's one that we've

touched on before. I guess the stion is, you know, the Federal Reserve is this sort of unelected um body that has a very specific mandate. But it feels like in a situation like this, they're encroaching on a bunch of different areas, but people aren't necessarily worried about it in this particular circumstance, because what they're doing seems very very needed. It. I just wonder how far it's going to go and what the pushback is going to be,

if there is any eventually. I also think it says something about sort of the US culture in US politics in general, that like, if if the Federal Reserve buys so called investment grade debt or backstops that market, like okay,

we need to do that credit dislocations, etcetera. But if the Federal Reserve were they say like backstop or by the debt of New York State or California, something like, oh, you're bailing out the states, and we we we have this like weird thing where in our system we're actually uh. The sort of central view of many people who sort of talk about that stuff is that it's somehow more legitimate to back up, backstop banks and companies than it would be to backstop New York City or New York State,

which is actually directly fighting this health h this health emergency. Yeah, as much as people complain about corporate bailouts, you can imagine it would be even worse for state bailouts. And again that's It's kind of weird because ultimately all the states are part of the United States of America, and yet we have these weird divisions. I guess that's the

nature of the US political system. But it is definitely worth discussing and worth reminding people of in the context of what's going on in finance and markets and the economy right now. And I think people forget just how much much friction there is between these individual state level governments and the federal government at the moment. Yeah, because the way the US is set up, there's all kinds of sort of gaps there, and I do think that's

really important. Like, look, we've had like this incredible crisis that pushed us from a very strong economy into sort of depression level economic activity for a while or in really just a matter of weeks, and even if we were to find a cure or a health solution in the next month or something, and of course no one

really expects that. The asymmetry is such that as um, I forget who mentioned it, I think it was Alex pointed out it took until fourteen during the last crisis to return to sort of a trend state tax collection, so it could just be. It could be years of unnecessary austerity budget cuts, further economic pain simply as a result of what could you know, and hopefully will be a very like short real shock to the system, which makes it all the more urgent to come up with

some mechanism to prevent that. Absolutely. Uh, time is of the essence here alright, speaking of time, shall we leave it there? Let's leave it there alright. This has been another episode of the All Thoughts podcast on Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe wi Isn't All. You can follow me on Twitter at the Stalwart, and you should follow our guests

on Twitter. They are Sconda Amarnath of Employee America. He's at Irving Swisher on Twitter, Yaca Fagan of the Burgrowing Institute He's at Buddy Yakob and Alex Williams of the Levy Institute. He's at Tragic Bios on Twitter. And be sure to follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg Head of Podcasts on Twitter, Francesca Levi at Francesca Today and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening to