Wednesday, March 18, 2020

WSJ oped on virus policy

Why is the market going nuts? What should policy do? I put some of my recent thoughts in a Wall Street Journal Op-ed, here. As usual I can't post the whole thing for 30 days, but if you're clever you can find it.

This is not a "demand" recession needing "stimulus." The economic policy challenge is to allow the economy to shut down, but make sure it doesn't die in the process. The problem is -- once again -- debt.
Had everyone kept a few months of cash around, things would be fine. But many did not. Now we are seeing the beginnings of a scramble for cash, as people and businesses try to sell assets or borrow. But who is buying? And who is lending? Banks can’t make new loans to companies and people with no income.
If there is a wave of firing and bankruptcy,
A pandemic can turn quickly to a financial crash and a long recession, not a V-shaped pause. That’s the scenario spooking markets, and it should spook all of us.
What to do? Clearly the central goal of policy should be to keep businesses alive so they are ready to turn back on again.  
The main focus of economic policy should be
Lending is better than transfers. Since loans must be paid back, larger amounts can go where needed. ...
Forbearance is important. Banks and creditors should not immediately shut down a nonpayer. But they have to be allowed to forbear by their regulators, their own creditors, and their own fiduciary responsibility, and to borrow or pass forbearance up the line....
Rather than give each of us $1,000, allow us to borrow a fraction of last year’s income from the Internal Revenue Service and repay when we file our taxes. That provides more money to those who need it, and helps those even with large debts not to default. Allow penalty-free withdrawals from retirement accounts. Social-program rules must be stretched. If people have to lose a job to get help, we tempt the employer to needlessly fire them, and they and the employer are not ready to start up again fast.
This is all really hard. Economists blogging from home are full of good and creative ideas. But changing rules for who banks can lend to, to create pandemic exemptions, is much much harder than writing checks. It would be awfully nice if anyone in government had put the slightest thought into this ahead of time.

We are headed to the second huge creditor bailout. When it's over, we need to start taking seriously that if you're too big to fail, you're too big to borrow. Airlines, this means you.

The Oped summarizes many ideas in condensed form. To see more, use the "pandemic" label below, or this link


  1. Maybe we shouldn't shut down the economy. CV is relatively safe for people under 50 -- about twice the mortality risk of the flu. If they want to keep active, let them (but don't force them). We'll get to herd immunity faster, and then us old farts can emerge too.

    1. Right. In fact, pay anyone $1,000 to be naturally inoculated (infected), children included with parental permission. Financed as helicopter drop.

      Declare a payroll-tax holiday, and adjust with-holding tax rates down sharply. Finance as helicopter drop.

      Let people keep the money they earn, instead of confiscating it.

      Will chopper-drops cause inflation? I hope so. I would happily accept 4% inflation for the next five years if it beat back a recession.

  2. As always we must not confuse the "we" pronoun used to describe all humans when we want to talk about bad policy choices. I don't make policy and neither does anyone reading this. The ever handy "They" makes policy choices, but that is why we are here advising them, whoever they are.
    Aside from adding priggish comments, I hope laissez faire laissez passer will ever be true.

    Self-quarantine and social distancing is good; stop handshaking (Jefferson invented it to replace bowing). I always hated the hugging craze. Never hug anyone except your own small children.

  3. I agree with your comment, but it runs contrary to current public opinion; so, for the time being, there will probably be too much shut-down.

  4. The repo market blew up in September when rates spiked, choking short-term lending. The Fed was force to provide liquidity. Mnuchin talking about bank holidays? The seeds of a run are in place. Is inflation on the horizon? A jump in unemployment. Decline in tax revenue and monetizing debt. Taking a position in TIPS might be a fair strategy.

  5. John how can you say it's not a demand problem? GDP is total spending by definition. While in the long run, it is investment and productivity which matters, in the immediate term, the economy runs on spending. Spending is being crushed. We know all spending = all income. Hence, when one entity's spending declines, another entity's income declines. The second entity then reduces their spending - and on and on into a potential downward spiral. That's what happened in the 1930s. This is what is happening and this is the problem. Does this point make sense to you? Thanks.

    1. To add in the context of some of your comments. Entities have trouble paying back loans when their income declines. Their income declines because someone else has reduced their spending. Hence the problem comes back to a spending, i.e. demand problem.
      I beg you to consider in this crucial time. Thanks.

    2. Dr. Cochrane said in a podcast it's not an Aggregate Demand (AD) problem. People want to spend money but their ability to spend has been crimped because of layoffs and/or businesses limiting or shutting down operations. Both demand and supply have been in a state of cardiac arrest - the hope is the economy can come back to life with proper stimulus that prevents economic atrophy.

    3. Thanks for response. If people's ability to spend has been crimped because of layoffs, etc. isn't that a demand problem - whether its lack of motivation or lack of ability? thx

  6. Financial asset prices reflect the estimated probability of default and bankruptcy of the issuer. This should not come as a surprise. Common stocks of commercial banks have been especially hard pressed. Crude oil prices have fallen some 50%. Losing half one's revenue stream in a very short period of time with no visibility on when prices will recover, tends to encourage speculation on default of not just the drillers and producers but also the banks that have lent to those entities, and banks that have lent to those banks, etc.

    Local governments are also vulnerable because their revenues are susceptible to the reduction in demand for services that generate tax revenues for the local government. For example, the City of Seattle receives 60% of its general revenues from taxes that are based on business revenues of the private sector. The city's budget director last week estimated the city's revenue would take a 7% hit ($110 million). But that was before the state governor, Jay Inslee, declared a state-wide emergency that has since closed restaurants, bars and gyms. The city now faces greater revenue losses. Its reserve funds totalling some $100 million are at risk of being depleted to shore up welfare services as the number of number of unemployed in the city swells. This is but one small example of the fallout.

    As to having sufficient cash on hand, much of what we call "cash" is held as deposits at banks and credit unions. Even if your balance is lower than the threshold for insurable deposits (cf., FDIC), should your bank fail for whatever reason, your funds on deposit become inaccessible for a period of time (4 to 6 weeks, perhaps). In essence, we become hostage to the financial system. Does anyone seriously think that households will hold $30,000 to $60,000 in bills and notes ("currency") in storage around the home?

    Likewise, financial investments are held in electronic form ("street name") at depositories in the name of the brokerage or bank. Bearer certificates are a thing of the past and are unobtainable. The investor is hostage to his brokers' continuance as a going concern.

    Confidence is the essence of our economy. When confidence is shaken, as now, the foundations of our way of life become questionable. It is entirely reasonable under the current circumstances to sell down financial assets, bonds, and common and preferred stocks. This is what we're seeing in markets today. Today, tomorrow, and very likely the remainder of the year.

  7. Wear n95 masks to prevent Corona Virus a little bit

    1. Hi Mr. Alex. Only wearing masks is not enough

    2. Only earing masks not enough, but its prevent little bit

  8. I would have thought rent is as big an issue as debt for small businesses that are shut down. Even if they don't have much debt, they have rent payments for office space, storefronts, etc. Even if the landlords want to go easy on them for a couple months, they themselves might be highly leveraged, so we're back to a real estate crunch, this time commercial. Residential too, of course, if people can't cover their mortgages or apartment rents.

  9. John, Your statement about forbearance is right on target! We have worked many years in menial jobs to be able to purchase rental properties. The government has made it near impossible to enforce our leases but at the same time refuses to do the same for their taxes. We in the middle face a dangerous time ahead only because the sister of the tax collector forces us to forgive but refuses to turn the other cheek!


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