The Pandemic Is Pushing Cities to Rethink How to Drive to Capital to Small

As of February 2020, counting currency in circulation, deposits in bank and credit union checking accounts, savings accounts, certificates of deposit, and money market accounts, the total money supply in the U.S. was $15 trillion. By February 2021, that number was $19 trillion — mostly a consequence of the Federal Reserve buying up U.S. government debt and mortgage-backed securities, with the goal of stabilizing the financial system at the onset of the pandemic.

That’s $4 trillion dollars the Federal Reserve created out of thin air — most of it created between February and April 2020.

But what did all those new dollars mean to the 22 million people who lost their jobs over those same months as the pandemic took hold? Ten million are still counted as unemployed today, not to mention the millions behind on rent or mortgage payments, at risk of eviction or foreclosure. Or what about for the estimated 41 percent of Black-owned businesses that closed over the same February to April of 2020?

State and local governments are using an assortment of tools to push that money in the direction of the people and businesses hit hardest by the pandemic — which happen to be disproportionately Black, Indigenous or other people of color.

Using public dollars to move private dollars

Small businesses have been seeking low-cost loans to stay afloat during the pandemic. In response, one of the many things the state of California did was work closely with federally certified community development financial institutions, or CDFIs, to tweak the parameters of its state loan guarantee program.

The state agreed to eliminate credit score minimums, collateral requirements and social security number requirements for the small business loans it backstops. It also eliminated personal guarantees — meaning lenders no longer needed to make an attempt to seize borrowers’ assets before requesting the state cover for a loan that went bad.

In California, the state planned for $50 million in loan guarantees to enable $100 million in small business loans from the private sector.

In New York State, two state agencies set aside a total of $20 million for a loan loss reserve to backstop $100 million in small business loans from the private sector under the NY Forward Loan Fund partnership. The partnership is also working through CDFIs across the state to originate the loans, with Locial Initiatives Support Corporation (LISC) serving as the back-office administrator. (LISC is also an underwriter of this project.)

There are some serious potential pitfalls when depending on the private sector to originate loans. If the private sector partners aren’t willing to make loans to Black people or other people of color, it just won’t happen. In the early days of federal mortgage insurance, the real estate industry’s role in crafting federal housing policy led to regulations that encouraged racial segregation while also discouraging loans to Black neighborhoods — the practice that became known as redlining. That’s largely how, from 1934 to 1962, the federal government insured $120 billion of home mortgages, but more than 98 percent of that went to white homebuyers to purchase homes in white-only suburbs.

While redlining has technically been illegal since 1977, it still happens — and not just in home mortgage lending. The SBA’s 7(a) program guarantees tens of thousands of small business loans a year, and it’s supposed to encourage small business loans to those who would not otherwise qualify, but only 2.3 percent of 7(a) program lending goes to Black-owned businesses, while only 12 percent goes to woman-owned businesses. The reasons for those numbers are many, including the parameters of the loans. Research from the National Community Reinvestment Coalition also shows there remains significant racial biases among small business loan…