Editor’s Note: In this BC Law Magazine “Vision Project” series, we are engaged in a lengthy discussion with Boston College Law School faculty about where the Covid-19 pandemic and its attendant medical, economic, racial, and political consequences may lead us. As New York Times op-ed columnist Timothy Egan so eloquently put it recently, “Every crisis opens a course to the unknown. In an eye-blink, the impossible becomes possible. History in a sprint can mean a dark, lasting turn for the worse, or a new day of enlightened public policy.” There are warnings and worries in these professors’ views, but there are also farsighted ideas and strategies for crafting a better future, a more just society, and a world in which each and every human being is equal under the law.
PROFESSOR PATRICIA MCCOY
Liberty Mutual Insurance Professor of Law McCoy helped found the Consumer Financial Protection Bureau and served as CFPB’s first assistant director for mortgage markets. Her coauthored book The Subprime Virus (Oxford, 2011) identifies the causes of the 2008 financial crisis.
The economic bailouts in response to the pandemic follow by a dozen years the bailouts that responded to the Great Recession in 2008 and 2009. Many observers see those earlier bailouts as having helped Wall Street and neglected Main Street. How fair is that perception? It’s entirely fair. The 2008 bailout was largely directed at big financial institutions. The Home Affordable Mortgage Program (HAMP), a well-intentioned program directed at struggling homeowners, did help a bit, but it failed to prevent five million foreclosures.
What has the national leadership learned from the 2008 bailout? They have learned something important: that financial institutions need bigger safety cushions to weather crises like the one we’re in right now. As part of the Dodd-Frank Act (2010), federal regulators have required banks and securities firms to greatly increase their capital, to enable them to absorb the shock of financial losses. The question remains whether the new capital requirements are high enough for banks to weather this crisis. It’s hard to know because we don’t know what shape the pandemic will take—whether there will be second and third waves of Covid-19 that will be even worse than the one we have now.
Has the response from Congress been aggressive enough to stabilize the economy and keep people fed and sheltered? Congress, in the new CARES Act, did respond aggressively in appropriating money for the stimulus checks that went out to citizens. The program not only helps families, it also supports consumer demand, and therefore the larger economy. If people lack money, they can’t buy things, businesses suffer, and their workers can lose their jobs.
I also applaud Congress for increasing unemployment benefits—by extending the length of the benefits, increasing their amount by $600 weekly, and extending the benefits to gig workers such as Lyft and Uber drivers. That’s good, but the rollout has been problematic. For one thing, the number of applicants has been so high that state unemployment offices can’t process applications quickly enough. In addition, some states—Florida is a poster child for this—impose prerequisites for unemployment benefits that many people cannot meet. Meanwhile, hundreds of thousands of unemployed people can’t pay their mortgages and rents. They’re also going hungry, which accounts for the huge lines we’ve seen at food pantries. One thing this points up is the substantial minority of Americans who lack emergency savings. When they lose their jobs, they run out of money quickly.
What about the effort to keep small businesses afloat? Also in the CARES Act, Congress appropriated a massive amount of money for loans to small business. The loans were supposed to be targeted at businesses most likely to suffer in the pandemic, such as restaurants and hair salons. These loans have a generous feature: If the business rehires workers, all or part of the loan will be forgiven. But once again, the rollout was handled poorly. The Treasury Department gave private banks the responsibility to take loan applications and act on them, and banks were reluctant to make loans to the smallest businesses because they couldn’t judge their creditworthiness. Medium-size businesses that have much more money and are lawyered up have had much more success in getting loans, and mom-and-pop and black-owned businesses have been shut out. So the program is well funded and well intended, but because of the implementation problems, I would give it a C+.
We’ve recently seen the firings of several inspectors general, including one who would have helped oversee the bailout. Should we be worried? I worry that the firings undermine the rule of law. Inspectors general assure that government aid is honestly administered, and historically they have been independent. There was a norm that presidents wouldn’t fire them except for cause. Here, however, the administration fired inspectors general for no good reason, which creates the concern that the distribution of vast government funds will be riddled with corruption.
What about the moves by the Federal Reserve Bank to stabilize financial markets? Are they wise, or just a bailout of rich investors? In mid-March a number of major credit markets froze up. Lenders refused to lend, and business borrowers couldn’t get needed funds. Partly in response, the Fed has supported the financial sector by signaling its willingness to make emergency loans to banks, money market funds, and the commercial paper market, which makes short-term loans to businesses. I generally support this action, which is straight out of the playbook from 2008, because the worst thing we could do is let credit markets collapse just when business needs loans to make it through the crisis.
Some writers on finance have been puzzled by the stock market’s performance during the pandemic. What do you make of it? We saw a precipitous drop at first, then a rebound, followed by extreme swings up and down. This volatility reflects investors’ continued concern about a new surge in Covid-19 cases, the effect of high unemployment on consumer demand, and the lack of Congressional will to enact more needed relief. Ultimately, economic uncertainty is bad for stocks.
In your book on the 2008 financial crisis, you paint a picture of rogue banks and financial firms taking advantage of lax regulations, loosely enforced. Will this new crisis reveal more skirting of rules by the financial sector? That’s hard to answer because we’re coming off a very strong economy, which can hide a lot of sins. We’re only three months or so into the pandemic crisis, and that’s too early to know whether misconduct is going on.
What about federal bank regulators. Are they doing better this time? Of the three prudential banking regulators, the Federal Reserve Bank has acted most responsibly. In contrast, the FDIC and the Office of the Comptroller of the Currency have acted in more overtly political ways, to curry favor from the banks.
I read that your old agency, the Consumer Financial Protection Bureau, has relaxed some requirements on banks and mortgage lenders. Yes, the CFPB has either suspended or relaxed, on an emergency basis, some rules having to do with mortgages and other consumer loans. In doing so, it says that it wishes to free banks from unnecessary regulations so that they can make more loans to consumers. My concern is that the bureau is cynically exploiting the pandemic to push deregulation.
What changes in financial regulation and oversight would help us face future emergencies? I think we need to focus on improving the financial resilience of households. There are a number of ways to do this.
First, we can improve our broken system of unemployment insurance. I would have a uniform set of federal requirements that states couldn’t alter and figure out a way to process claims faster.
Second, we need to raise the wages of low wage workers, many of whom are black and minority, which would allow them to have a financial cushion to fall back on in a crisis.
Third, we should consider mandating loan clauses that provide for debt relief in a national crisis.
Finally, we should consider a system of federal business insurance for catastrophes like the pandemic. The private insurance industry can’t underwrite widespread catastrophes, so the federal government should step in.
One caveat: Congress needs to consider seriously the effect of this spending on the federal debt and deficit. This means taking another look at taxation.
The recent protests led by Black Lives Matter have given new fuel to conversations about fairness and race in our financial arrangements. In addition to increasing the minimum wage, what changes would help reduce those inequities? Black Americans continue to suffer from hundreds of years of structural economic inequality. Subpar education limits opportunity for access to the best-paid jobs and careers. Lingering race discrimination means lower average wages for black employees compared to their white peers. Meanwhile, the median black family only has a disturbingly small fraction of the median white family’s wealth, largely due to racially restrictive covenants that blocked blacks from homeownership as recently as the 1960s. These problems are all civil rights issues and they must be addressed for society to be equitable for all.
Read all faculty Vision Project interviews here.