The uncertainty many businesses faced during the COVID-19 pandemic was ameliorated to some extent by legislation passed by the United States federal government in the form of the Paycheck Protection Program.
In its most basic form, the PPP loans made to businesses were intended to keep them operating in some capacity while the novel coronavirus caused unexpected shutdowns and delays across the world.
Beyond that, the PPP loans hoped to guarantee a minimum level of spending and economic activity in order to keep the monetary system flowing.
After all, the cycle of businesses failing and workers losing their jobs because no one is spending money becomes self-perpetuating at a point and this kind of race to the bottom is something lawmakers and financial institutions wanted to avoid if at all possible.
Of course, no program is perfect, and the PPP loans are probably one of the better programs to launch in the middle of a crisis, but some bad actors have overshadowed the vast amounts of good that the program helped create.
We’ll go over what the basic concept behind PPP loans is, how they are intended to function in the broader economy from a business and consumer perspective, and why accounts of fraud and misuse are more common than stories of success and overcoming in the media.
The Basic Concept Behind a PPP Loan
Passed as part of the CARES Act, the PPP loan program was intended to help keep businesses afloat during economically uncertain times.
The basic concept behind a PPP loan, as outlined above, was to keep businesses operating on as normal a basis as possible while the novel conditions of the COVID-19 pandemic raged.
In essence, it was like providing business insurance on a broad level to companies that would otherwise have had to utilize other credit lines or left with spending whatever cash they had on hand.
Keeping people on the payroll, meanwhile, was seen as a more effective way to stimulate the economy in the short term and jumpstart it once the pandemic had subsided.
The thinking along these lines goes that it would be much more difficult for businesses to hire workers back than it would be for them to just keep them on the payroll even at a reduced rate if necessary. Given the myriad difficulties businesses are now facing in trying to procure employees, this aspect of the PPP loan program not only seems prescient but also robustly planned. The only real drawback to the PPP loan program is that it did have a definite end date or, in other words, the government expected the pandemic to be a relatively short-lived crisis with one year at most allotted in the funding for the program.
Had the economy experienced a more prolonged shutdown and subsequent downturn, the PPP loan program possibly would not have sufficed and a more comprehensive program with a greater vision along the lines of Franklin Roosevelt’s New Deal would have become necessary.
How PPP Loans Work in the Broader Economy
Underpinning all of these real-world goals of the PPP loan program is a mechanical function of the economy that, if placed into abeyance, had the potential to throw the entire global financial system into a tailspin.
What is this mechanism?
Nothing more complicated than the simple contractual agreements that govern business relationships between parties. Think of loans, rental agreements, leases, options, and service agreements, among other things. These are the building blocks and the sinews of the global financial system and they are the bedrock upon which everything is placed. Should a crack form here, it could prove more than catastrophic. Beyond that, regulators and legislators could enter into a situation wherein all of their tools and legislative might is unable to stave off a collapse that gains more momentum as it gets worse.
Essentially, the brick and mortar of the economy, the expectation that the other party will come through on their end of a bargain and, if not, you will have some sort of way to pursue redress was being fundamentally challenged by a new world reality wherein no one could pay their bills. Again, like the self-perpetuating cycle of unemployment leading to a lack of consumer spending thus leading to a lack of jobs, the default of one borrower leads to that of another and another.
This can be across economic areas such as in rental agreements failing, mortgages going bad, and leases getting canceled. Homelessness, bankruptcy, and indigency are sure to follow for both employees and businesses. It is no mistake that, among the many actions taken by the federal government, a nationwide eviction moratorium was among them and specifically for the vicious cycle feedback loop outlined above. We don’t have to look too far in history for a precedent for this, either, as the Great Depression in the United States displaced more people than any other event since the Civil War.
From a Business Perspective
Businesses that utilized PPP loans did so with the hope of keeping the above contractual obligations current as well as providing a platform from which the business could launch its recovery once the economy reopened. PPP loans were not intended for capital expenditures, such as building out a new part of the business or buying new equipment but rather aimed at preserving jobs to the greatest extent possible. This had the added benefit of keeping essential industries open during the pandemic and thus guaranteed some semblance of the supply chain was functioning.
Imagine a world in which authorities have to figure out not only how to vaccinate everyone but how to do so when much of the supply chain for goods and services are shut down. Providing easy loans at low rates also helped get more businesses on board with the program because it minimized the direct risks to their bottom line.
From a Consumer Perspective
When you look at PPP loans from the perspective of an employee or consumer, this same contractual mechanism comes into place albeit on a smaller scale.
Beyond making sure that people can pay their rent, mortgages, car loans, and beyond, you want them to also be able to stimulate economic activity on some level with their excess cash.
Again, we have to remember that officials were dealing with a situation in which vast swathes of the economy were shut down yet they still needed economic activity to avoid total collapse. The PPP loan program was a great way to keep everything on some form of life support.
PPP Loans and the Finance Industry
None of this would have happened without the efficient cooperation of the finance industry.
Probably the single segment with the most to lose during the COVID-19 shutdown, the financial industry was buoyed by the fact that the government largely eliminated most of the risks for them in issuing PPP loans.
Facing a range of defaults from mortgages to consumer credit to business loans and beyond, the financial sector was also facing the increased pressures of paying firms who were beginning to leverage their credit lines, withdraw their funds, sell their holdings, and otherwise move massive amounts of liquid and illiquid funds to stave off collapse in their core business. Here, the PPP loans provided the breathing room banks needed to accommodate the new needs of the pandemic economy.
Naturally, making a loan easier to obtain can also lead to some problems down the road, many of which we are just now starting to see. Prominent among these issues are PPP loan fraud and the abuse of funds. Yet, as attractive as this is as a headline, it is much rarer in practice than the media would have the public believe.
PPP Loans and Fraud: Rarer Than You Would Believe
The first thing to keep in mind about PPP loan fraud is that the program is not unique in its ability to attract fraudsters nor is it more prone than most to abuse.
Where the real tale of the tape comes in with PPP loan fraud is how many people are being prosecuted for it and the numbers here are quite staggering indeed. Essentially, if you want to steal money from the program, you better be prepared to hire a lawyer.
From accepting citizen tips on PPP fraud to investigating it themselves, the government is taking a vigorous approach to punishing fraud where it occurs. Several prominent examples include jail time such as in the case of a Florida man who borrowed $3.9 million from the program, bought a Lamborghini, got caught, and forfeited the funds, his private property, and is now spending six years in jail.
There are, in fact, many such examples where the perpetrator was caught misappropriating PPP funds for something like an exotic sports car, among other things.
The PPP Program: Looking Ahead
As the pandemic wanes, more attention is being turned to the failures of the PPP loan program though its many successes will also become the subject of study and scrutiny in the coming years.
While it was far from perfect, the PPP loan program did provide the federal and state governments with an interesting template on how to deal with economic crises on a more micro level than had ever happened before; thus, we expect more novel approaches like this to occur in future crises and the government’s involvement in the economy during these times will likely be expected and anticipated as a result.
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