Bond liquidity

When the Fed stepped in, were corporate bonds "illiquid," the market "dysfunctional," or were the prices just low, as they should be in advance of a Great Recession with larger bankruptcy risk? Did the Fed "liquefy" the market, "intermediate," grease the wheels, or is it just buying, and propping up prices so that bondholders can dump bonds on the Fed before things get really bad?

I asked for evidence on bond market liquidity in my last post on the topic, "Bailout redux," and Pierre-Olivier Weill passed on a paper he has recently written with Mahyar Kargar, Benjamin Lester, David Lindsay, Shuo Liu, and Diego Zúñiga, Corporate Bond Liquidity During the COVID-19 Crisis.

Here is their estimate of roundtrip trading costs -- if you buy and then sell, how much do you lose in bid ask spread. Feb 19 is the stock market peak.  March 18 is the day after the Fed announced it would lend money to broker-dealers and take bonds such as these as collateral. March 23 the Fed announced it would buy corporate bonds on the secondary market, and buy directly from companies issuing new corporate bonds.

We were prepared

A lovely compilation from Judge Glock. Some excerpts

six months before the current outbreak, Congress passed the Pandemic and All-Hazards Preparedness and Advancing Innovation Act of 2019, which offered funds and planning authority for just such a crisis as we now face.[2] This act was a reauthorization and an extension of half a dozen similar acts passed over the previous two decades, which acts were themselves extended in countless congressional spending bills, all of which resulted in countless plans....

Pervasive Pandemic Preparedness Planning

After the avian influenza scare of 2005, Congress did the thing it does best, demand that somebody else come up with a plan. With the help of some of the best known names is Congress, Congress passed the Pandemic Preparedness and Response Act in December of the following year.[3] The act ordered the administration to convene a Pandemic Influenza Preparedness Policy Coordinating Committee, with most of the Cabinet in attendance, to write a plan for a biological catastrophe.[4] The result was, first, a White House Homeland Security Council National Strategy for Pandemic Influenza, followed the next year by National Strategy for Pandemic Influenza Implementation Plan. The latter plan contained 233 pages of nebulous suggestions, such as recommending that, in a crisis, the government should be “providing anticipatory guidance and dispelling unrealistic expectations about the delivery of health and medical care.”[5] These general plans in turn birthed numerous individual departments plan, such as the Department of Defense Implementation Plan for Pandemic Influenza.[6] To supplement these federal plans, the Preparedness Act, and its subsequent iterations, also mandated that states create their own Pandemic Preparedness Plans, which have to be submitted regularly to the Centers for Disease Control and Prevention for approval. These plans total thousands of pages.[7]

Mitigating moral hazard -- unemployment edition

As Kurt Huffman, restaurant owner, writes vividly in the WSJ, concerns that unemployment insurance paying more than wages might induce people to stay home even when jobs are available  are not just scare stories told by heartless free-market economists.

 ...we realized that we needed to hire back some of our staff to help with the demand. That proved harder than we expected.

We started making the calls last week, just as our furloughed employees began receiving weekly Federal Pandemic Unemployment Compensation checks of $600 under the Cares Act. When we asked our employees to come back, almost all said, “No thanks.” If they return to work, they’ll have to take a pay cut.

This has had the perverse effect of making it impossible for us to hire enough people even for our limited takeout and delivery business at a time of rapidly rising unemployment...it will persist at least until July 31, when the unemployment bonus expires. ...

The Trump administration is talking about setting a timeline for when the country can “open for business.” For my business, Congress has already locked down that date. We plan to open our dining rooms on Aug. 1, once the government stops paying people $15 an hour, on top of standard unemployment compensation, to stay home.

Hint to Mr. Huffman: I would not bet too much that this deadline is not extended.

Lars Ljungqvist and Tom Sargent long ago pondered the question why Sweden, with an apparently quite generous unemployment insurance program had so much less unemployment than, say, France. The answer, as I recall, is that Sweden had a bit of stick with the carrot: if you got offered a job, you had to take it or lose unemployment insurance.

It's in Ljungqvist, Lars and Thomas J. Sargent. ”How Sweden’s Unemployment Became More Like Europe’s” in Reforming the Welfare State: Recovery and Beyond in Sweden, eds., Richard B. Freeman, Birgitta Swedenborg and Robert Topel. Chicago: University of Chicago Press, 2010, one of many great papers Lars and Tom wrote on unemployment insurance.  I don't have a link to an online version.  p. 191:

"The Swedish government was exceptional among European countries in intervening in workers' search processes by monitoring them to make sure they accepted job offers that the government deemed to be acceptable. "

A similar idea might make sense to get the US going again. Our unemployment insurance has been extended from those fired to those furloughed. Surely if your employer says "we need you back now," the extra Federal unemployment insurance that pushes wages above replacement for furloughed workers can cease.

Forbearance

Peter Wallison has a worthy OpEd in the WSJ, "Forbearance." Continuing my earlier thoughts on the financial response here and here, I don't think he goes far enough.

Let me tell a little story. Andy runs a restaurant. To run the restaurant, and live, he has a mortgage, he rents the restaurant space, and he borrowed money to buy to buy the equipment. Bob is retired. While he was working he lent Andy the money to buy the house and the restaurant equipment, and he owns the building. He lives off the income from these investments.

The virus comes and Andy has no income. He has enough savings to buy food for a while, and other current expenses. But he can't pay rent, mortgage, and debt payments. This is the central problem our government faces right now.

One answer: The federal government prints money and lends it to Andy so he can keep paying Bob. You can see a major problem here. Andy has no income. Eventually the restaurant may reopen, but then from the same profit stream Andy has to keep paying Bob and also pay back the loan that kept things going in the lockdown. Hmm.

Tidbits of wisdom

From my Hoover colleague Niall Ferguson

It is not just that Trump bungled his response to the crisis (though he certainly did). Much more troubling is the realisation that the parts of the federal government that are responsible for handling a crisis like this – supposedly, the genuine experts — bungled it too. 

The United States Department of Health and Human Services is a mansion with many houses, but the ones that were charged with pandemic preparedness appear to have failed abjectly: not only the Centers for Disease Control and Prevention, but also the Food and Drug Administration and the Public Health Service, as well as the National Disaster Medical System. 

Kocherlakota on moral hazard

I found a kindred spirit. Narayana Kocherlakota, ex president of the Minneapolis Fed, shares my concerns over the current lending and bailout spree, in particular propping up the prices of corporate bonds.

In its last financial stability report of 2019, the Fed highlighted how many nonfinancial corporations were making use of highly risky debt. The report pointed out that “a number of contacts expressed concern that a U.S. recession would expose highly leveraged sectors … concerns related to nonfinancial corporate debt were cited most frequently, with a focus on the growth in leveraged loans, private credit, and triple-B-rated bonds.” 

The financial stability report, of course, made no mention of pandemics or social distancing. It didn't need to — the risk to the financial system and the economy is posed by any recessionary shock. The coronavirus just happened to be the first one that come along.

Bailout redux

The greatest financial bailout of all time is underway. It’s 2008 on steroids. Yet where is the outrage? The silence is deafening. Remember the Tea Party and occupy Wall Street? “Never again” they said in 2008. Now everyone just wants the Fed to print more money, faster. (Well, there are some free market economists left. But we're a small voice!)

Maybe the Fed is right that if any bondholder loses money, if bond prices fall, if companies reorganize in bankruptcy, the financial system and the economy will implode. I am not here today to criticize that judgement. But if so, we must ask ourselves how we got to this situation, again, so soon. Once is an expedient. Twice is a habit.  It is clear that going forward any serious shock will be met by bailouts, and the Fed printing reserves to buy vast quantities of any fixed-income asset whose price starts to fall.

Why does the Fed feel the need to jump in? Because once again America is loaded up with debt, because bankruptcy is messy, and because the Fed fears that debt holders losing money will stop the financial system from providing, well, more debt.

This crisis is a huge wealth shock. The income lost during shutdown is simply gone. The question is, who is going to take that loss? Borrowing to keep paying bills, the current solution, posits  that future profits will soak up today's losses. We'll see about that. The CARES act puts future taxpayers squarely on the hook to pay today's bills. But where do those bills go? To creditors -- property owners, bond holders, and so forth. If we're looking around for pots of wealth to absorb today's losses, why are bondholders not chipping in? The biggest wealth transfer in history is underway, from tomorrow's taxpayers to today's bondholders, on the theory that if they lose money the economy falls apart?

OK, but why did America load up with debt again, apparently all "systemically important?" Could the expectation of a bailout any time there is an economy wide shock happens have had something to do with it? Will we do anything when this is over to stop companies from once again loading up with debt -- especially short term debt -- and forcing the Fed's hand again?

Meantime, anyone who hoarded some savings in the hope of profiting from fire sales, in the hope of providing liquidity to "distressed markets" has once again been revealed as a chump. Will we do anything to encourage them? Will lots of debt, private gain, taxpayers take the losses,  be the perpetual character of our financial system.

"You can't worry about moral hazard in a crisis," they said, and they didn't. At least last time there was some recognition of moral hazard, and a promise to clean up the moral hazard with reform. Will there be any such effort this time? Is anyone even thinking about the enormous moral hazard we are creating with these precedents? Will  the financial system perpetually a four-year-old on a bicycle, a parent running closely behind with one hand on the seat? Will the "Powell put" on fixed income grow ever larger? Or will we, this time, finally cure the financial system so it can survive the next shock?

A bailout 

Small but symbolic: The federal government just bailed out the airlines -- or more precisely airline stockholders, bondholders, unions, airplane leaseholders and other creditors who would lose in bankruptcy.

 "big airlines will receive 70% of the money as grants—which won’t be paid back—and 30% as loans. The cash comes with strings attached: Airlines must give the government warrants amounting to 10% of a given loan’s value that can be swapped for stocks; they cannot lay off staff until September; and they face restrictions on dividends, buybacks and executive compensation."

Oh, and as the article makes clear, this only gets us maybe through the summer. Anyone want to take a bet that planes are full again by September?

The big banks got bailed out in 2008 — or more precisely, the stockholders, bondholders and creditors of the big banks got bailed out.  Never again, they said. Again.

Now, one can make a case that big banks are “systemic,” that if their bondholders lose money the financial system collapses. Just how are airline bondholders “systemic?” What calamity falls if airline bondholders don’t get paid in full?  Just why is a swift pre-packaged bankruptcy not the right answer for airlines? This seems like a great time to renegotiate airplane and gate leases, union contracts (some require the airlines to keep flying empty planes!) fixed-price fuel contracts and more.

If taxpayers have to give airlines cash grants don't we get some reassurance this doesn't have to happen again? Even I would say, no more debt financing. You can see the instinct in "restrictions on dividends, buybacks and executive compensation." Democrats in Congress wanted "stakeholder" board seats, carbon reporting, and more. Why not go full Dodd-Frank on them? Detailed regulation of their financial affairs, stress tests to make sure they can survive the next time? Like banks, the existing airlines might not end up minding so much a return to the 1970s status as regulated utilities. Or, more likely, like GM, we just forget about it, let them load up on debt again, and pretend there won't be a 2030 bailout?

The Fed's big artillery

The real action is at the Fed. The Fed is buying commercial paper, corporate bonds, municipal bonds. The Fed is explicitly propping up asset prices. The Fed is also lending directly to companies. The current guesstimate is $4 trillion, with $2 trillion already accomplished. More is coming.

It started "small" On March 17, the Fed bailed out money market fund investors, buying the “illiquid” assets of those funds so that the funds could continue to pay out dollar for dollar.  Recall that in 2008, the Fed and Treasury bailed out money market fund investors, buying assets to stop a run on money-market funds' promise that you can always cash out at $1. Never again, they said. Fixed dollar promises must be backed by Treasuries, other funds must let asset values float. Again.

On March 17 the Fed also announced it will buy commercial paper.  “Directly from eligible companies.” Yes, the Fed prints reserves to lend directly to companies that can issue A1/P1 commercial paper.

"By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market. " 

Why are companies borrowing long term by rolling over commercial paper? Didn't we learn anything about rolling over short term debt in 2008? Are we going to follow up by putting a stop to that? Why don't companies have more equity financing, on which they can just stop paying dividends?

"Investors" you say, it's not all the Fed. Read carefully. "By eliminating much of the risk..." The Fed props up prices, and removes risk. Then private investors will come in. The markets won't ride that bike without the Fed's hand on the saddle, apparently. Why do we bother to have private markets?

On March 17 the Fed started to lend again to primary dealers. These are the traders, much maligned by the Volcker rule.

The PDCF will offer overnight and term funding with maturities up to 90 days...Credit extended to primary dealers under this facility may be collateralized by a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities. 

Let's translate. You're the trading desk at, say Goldman Sachs. You want to buy stocks, as you think people are dumping in a hurry. Great, that's what traders are supposed to do: "provide liquidity." But, sadly, you're in the habit of of funding trading activity by borrowing money, short term. And you can't do that right now. So the Fed will now lend you the money to buy stocks, and will take the stocks as collateral! It's almost as if the Fed is buying stocks -- except you get the gains, and if you go under, the Fed gets the stocks! (A friend in the securities industry say nobody is bothering to investigate and price high grade corporates. The Fed is setting the prices.)

Again, the Fed is between a rock and hard place. Yes "balance sheets are constrained." Trading firms don't have enough equity to take on additional risk. The natural buyers at asset fire sales are constrained out of the market. Bail the Fed feels it must. But this is exactly what happened when the Fed first lent to broker/dealers in 2008! Why in the world are we in this position, 12 years after that crisis?

On March 20, the Fed expanded into state and municipal markets. The mechanism is the same: Fed lends to a financial institution, which buys the assets, and then gives the Fed the assets as collateral for the loan. Once again the point is  "enhance the liquidity and functioning of crucial state and municipal money markets."

On March 23, the Fed rolled out real artillery. Ominously, Treasury markets appeared "illiquid," so the Fed has stepped in buying $1.3 trillion in the first month -- more than the Treasury issued.  The Fed is funding Treasury borrowing with newly printed reserves.  The Fed now buys mortgage backed securities.

And now.. corporate bonds. This is well past 2008.

the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.

Translation: The Fed will buy new corporate bonds, thus directly lending to corporations. And it will buy  outstanding bonds.

Why would it do that? Well, to "provide liquidity." This is a word that ought to set off BS detectors. Yes, there is such a thing as an "illiquid" market. There is also such a thing as a market whose prices are dropping like a stone. Sell all you want but at 50 cents on the dollar. "I wish I had sold at yesterday's prices" is not illiquidity. You have to pay people a lot to take risk right now. Which is it? Hard to tell. There are ways to tell, of course. For example, illiquid markets have negative price autocorrelation -- a low price today bounces back. I am not aware of the Fed having applied this or any other test. (Research topic suggestion.)

Again, I don't want to criticize, but there sure is a danger of propping up prices under the guise of "illiquidity." The Fed's view that if the Fed takes all risk off the table "liquidity" will reappear is also pretty close to taking risk off the table so prices will rise.

The Fed is already buying new bonds from companies to finance their new expenditures. Propping up prices of existing bonds is a way to let old bondholders cash out at high prices, now before the deluge. Just why can't old bondholders even take mark-to-market losses?

And, if corporate bondholders need to be bailed out in this way, are we going to do anything about it going forward? Do you get to buy junk bonds, high interest municipal debt, and the Fed will let you out if anything bad happens?

Wrap up

OK, I haven't even gotten through March and the Fed is just getting going. Let's wrap up.

The Fed has felt the need to take over essentially all new lending in the economy. The Fed is also propping up most fixed-income prices. The Fed is deliberately removing risk from holding these assets.

Once again, I will be told, "this isn't the time to think about moral hazard." But having done this twice, the first time with huge protest, the second time as if it is perfectly normal, this is the pattern, and the moral hazard is there. The economy will load up on debt, especially short term debt. People will not keep stashes of savings around to provide liquidity or jump on buying opportunities. And the need for bailouts will be larger in the next crisis.

"But the Fed made money in 2008" you may retort. And it has a half chance of making money again. If the recession wraps up in September and these "loans" get paid back, it will do nicely. If the recession goes on a year and all these "loans" go sour, it will not look so pretty.

Yes, in 2008 the Fed and treasury successfully operated the world's largest hedge fund, printing money to buy low-price assets. But is this really the function of the Federal Reserve? Do we want it driving private hedge funds out of the liquidity provision business, by its ability to print rather than borrow money, and by the off-balance-sheet put that the US taxpayer will in the end take losses if this massively leveraged portfolio doesn't work out?

Where is the outrage? Where are the financial economists? Where is the reform plan so we don't do this again? At a minimum, can we say tha  the government could stop subsidizing debt, via tax deduction and regulatory preference for "safe" (ha!) debt as an asset?

Hello out there? In 2008, everyone was writing financial crisis papers. Now everyone is playing amateur epidemiologist.

Finance colleagues, you have a bigger crisis and intervention to study, and a deeper set of regulatory conundrums. Is everyone just too scared of sounding critical of the Fed? Get to work!

The Fed and Treasury's actions are telling us we are on the verge of financial apocalypse. Let's wake up and look at what's coming, especially if it doesn't all get better by September.

Some links 

This post continues from Financial Pandemic.

I had planned a longer post on the details of many of these programs, but this is long enough.


A great explanation by Robert McCauley in FT. Section heads include  1) Acting as a lender of last resort to securities firms, 2) acting as a lender of last resort to investment funds, 3) acting as a securities dealer of last resort, 4) acting as a securities underwriter of last resort and finally 5) acting as a securities buyer of last resort.

A simple tweet storm by Victoria Guida

Via the indefatigable Torsten Slok,

Financial Policy During the COVID-19 Crisis MIT opeds on financial affairs

A great list of policy trackers.

Financing Firms in Hibernation During the COVID-19 Pandemic

The Yale Financial Stability Tracker and especially the Finance Response Tracker are very useful list of what's going on.

Fed Intervention in the To-Be-Announced Market for Mortgage-Backed Securities
by Bruce Mizrach and Christopher J. Neely is a very nice description of what's going on there

The United States as a Global Financial Intermediary and Insurer by Alexander Monge-Naranjo. More contingent liabilities waiting for Uncle Sam bailouts.

A data set of international fiscal responses

Subways and virus

The Subways Seeded the Massive Coronavirus Epidemic in New York City is an intriguing and delightfully written article by Jeff Harris

New York City’s multitentacled subway system was a major disseminator – if not the principal transmission vehicle – of coronavirus infection during the initial takeoff of the massive epidemic that became evident throughout the city during March 2020. The near shutoff of subway ridership in Manhattan – down by over 90 percent at the end of March – correlates strongly with the substantial increase in the doubling time of new cases in this borough. Maps of subway station turnstile entries, superimposed upon zip code-level maps of reported coronavirus incidence, are strongly consistent with subway-facilitated disease propagation. Local train lines appear to have a higher propensity to transmit infection than express lines. Reciprocal seeding of infection appears to be the best explanation for the emergence of a single hotspot in Midtown West in Manhattan. Bus hubs may have served as secondary transmission routes out to the periphery of the city

Later in the article

The Metropolitan Transit Authority’s decision to cut back its train service to accommodate the reduced demand may have indeed helped to shore up the agency’s financial position, but it most likely accelerated the spread of coronavirus throughout the city. That’s because the resulting reduction in train service tended to maintain passenger density, the key factor driving viral propagation (Goldbaum and Cook 2020). How ironic it is that, from the public health perspective, the optimal policy would have been to double – maybe even triple – the frequency of train service. The agency’s decision to convert multiple express lines into local service only enhanced the risk of contagion (Goldbaum 2020). How ironic it is that the preferred policy would have been to run even more express lines. We have not seen any public data on the incremental cost of the agency’s decision to begin to disinfect subway cars twice daily. Still, it is natural to inquire why the cars weren’t disinfected every time they emptied out of passengers at both ends of the line.

Why not continually? There are a lot of unemployed people being paid by the government. Why not send a cleaning crew of 10 to continually wipe down each train, monitor mask use, and social distance protocols?

London apparently made a similar blunder.

Comment: I've been harping for a while on the fat-tailed distribution of activities. Shut down the super-spreading activities. Shut down dangerous activities not specific businesses. Consider lost income.

But how do you shut down the subways in New York City? How do you run subways in a vaguely safe way? If the virus lasts, getting around NY is going to be a mess for a long time.

Negative oil prices

A fun tidbit sent to me by a good friend in the money management industry.

NYM WTI Crude oil is negative $37.73. They pay you to take it. The catch: you need an oil tanker and a place to park it. It went down from $-11.42 in the 10 minutes we were emailing about it.

Update: 

From an email correspondent:

Exchanges are very careful to match approved warehouse space with the production capacity of the region surrounding the delivery point.

Warehousemen can do extremely well under conditions of surplus supply.  Where are the warehousemen?

I would expect that EPA regulations on constructing tank storage and pipelines have hampered the response time in developing storage capacity.

The latter I can believe. China can build a hospital in 10 days, but zoning permitting and many other regulations would make it impossible to build an oil storage tank in a mere 2 months in the US.

Where is the US strategic petroleum reserve?

Good fellows and grumpy podcast

Niall Ferguson, H.R. McMaster and I did another "good fellows" discussion here

And the latest Grumpy Economist podcast

Update:
To readers having trouble,  you did figure out to click the link above, not the picture, right? I haven't figured out how to launch the podcast directly from this blog. You have to go to the link on the hoover website. Thanks for your persistence.
John

Weisbach advice

Mike Weisbach is writing an excellent book of advice, A Field Guide to Economics: A Young Scholar’s Introduction to Research, Publishing, and Professional Development. As a good scholar he is circulating the manuscript. It's really half advice and half a meditation on how the profession works and how it should work.

There is a lot of good advice, and a lot of good questions. I'll highlight a few things I disagree with, but don't take that as criticism of the project, rather an invitation to read and think about the issues yourself.

Real time labor market survey

Alex Blick and Adam Blandin are putting together a real-time labor market survey.

Labor market statistics for the United States are collected once a month and published with a three week delay. .... Currently, the most recent statistics refer to the week of March 8- 14; new statistics will not be available until May 8...

This project aims to provide data on labor market conditions every other week, and to publish results the same week, thereby reducing the information lag. We do so via an online labor market survey of a sample representative of the US working age population. Our core survey closely follows the CPS, which allows us to construct estimates consistent with theirs.

The first wave of our survey covers the week of March 29-April 4. Our findings reveal un- precedented changes in the US labor market since the most recent CPS data were collected:

1. The employment rate decreased from 72.7% to 60.7%, implying 24 million jobs lost.
2. The unemployment rate increased from 4.5% to 20.2%.
3. Hours worked per working age adult declined 25% from the second week of March.  Half of this decline is due to lower hours per employed as opposed to lower employment.
4. Over 60% of work hours were from home, compared with roughly 10% in 2017-2018.
5. Those who still have their jobs are working fewer hours; 21% report a decline in earnings.
6. Declines were most pronounced for workers who were female, older, and less educated. 

Bottom line, even worse than you thought. Well, if we shut down the economy, we shut down the economy.

Ready to reopen?

Are we ready to reopen? No but not for the usual reason.

Once we have testing we can reopen, says conventional wisdom. I doubt that. Who is going to give these tests, and what are they going to do with the information? 

Maybe maybe maybe if we had a free test, with instant results, that every American (and person flying in on a plane) could take every day; if almost all Americans were actually willing to take said test; and if people were universally willing to quarantine themselves upon its results, the test might help. But even that's a pipe dream. 

We won't have a vaccine, applied to the entire world's population, for a long time. "Herd immunity" seems unlikely. It's not even clear that exposure to COVID-19 confers immunity. (I've been looking for any study of how often people who had it once get it again. Let me know if you see one.) The whole point has been to bend the curve so that the vast majority don't get it. 

So, we will have through summer and fall, a pretty susceptible population and a virus ready to break out any chance it gets to. 

The point of "testing" and "reopening" is to have a system whereby public health interventions take the place of draconian economic shutdown to keep the reproduction rate under one. 

Public health does not mean just lots of tests. It means using the tests to identify small outbreaks and keep them from getting big. And that requires a tooled up, effective, nimble, local, public health bureaucracy. And a bureaucracy that steps on a lot of toes. 

Suppose your neighbor gets one of these tests and is positive. What gets done about that? First of all, under HIPPAA, his or her test result is nobody else's business, not even local government. Who forces him or her to self-quarantine? Who forces them to get the test if they know forced quarantine is coming? 

In Asia, apps tell you who got tested and the result. You can judge if you had contact. Or state  surveillance tells you that tracking your cell phone and theirs the authorities know you had dinner together last week and you're being isolated now. We, properly, have big laws against all of this! Are we willing to do this? How fast? Will we faintly have the capacity to do it? In a month? 

Maybe after weeks of wrangling, local public health officials (which local public health officials?) can use the information to decree there has been a positive test on your block and impose a quarantine on the whole block. The heck with that, say you, proud American. Like me, you've been strenuously distancing for a month, so you know you haven't got it from the neighbor, you're off to the newly opened park for a jog. Obviously, such edicts will have to be enforced, against a restless and resentful populace. Can you really see cops cordoning off apartment houses, blocks, towns, controlling who goes in and out? Do we even have cops to do it? And the method to figure out who goes where?

"Testing" and "tracing" are popular. Do most Americans (and our 10 million undocumented residents!) really want to tell someone from the government every person they've met in the last two weeks? Knowing the government is likely to quarantine them and ask more questions?  Or let them track your phone? Or carry your phone the minute you know they're tracking it? 

Birthday parties are just as bad as bars. Are we going to allow health authorities to monitor our cellphones and bust up birthday parties? 

A key part of public health is to isolate known areas. Are Americans going to put up with travel bans?  Are there any public authorities with the competence to put in place data-driven nuanced travel bans? Again, for the vast majority of people, the travel ban will be a senseless annoyance. 

We will need a robust public health response, to keep a small number of cases from ballooning, and allow the economy to open. We will need the response we should have had in January. "Testing" is one of many inputs to that response. But "testing" is not the response itself. An effective public health response needs a detailed, competent bureaucracy, temporary relief from thousands of privacy regulations -- and swift assurance that those privacies are reinstated when it's over -- and enforcement in order to something useful with the tests. I doubt Americans will put up with the enforcement. I doubt our government has the capacity to put them to that test. I hope I'm wrong as the alternative is waves of lockdown.  

MR Admiration

24 hours of Marginal Revolution:

April 16 1:23 PM Covid-19 Fast Grants update

April 16 12:15 PM. The vital daily links, including

2. An alternating lockdown strategy.
3. Vox on the Watney Stapp Mercatus mask plan.
4. Derek Lowe on vaccine prospects.
5. Will coronavirus change the proper CPI bundle?
6. “This paper argues that daily ‘universal random testing’, as recently proposed by Paul Romer, is not likely to be an effective tool for reducing the spread of Covid-19... Link here.
7. Why is Detroit worse than Baltimore?  And is there also a Brazilian heterogeneity? (limited information, however)
8. JPMorgan reopening plan, involves building herd immunity among the young. ...
9. How well did Italy do lowering R0 through lockdown?  [Very important -- models predict much swifter end than were are seeing]
11. Ongoing chart of Covid-19 deaths in Sweden, also accounting for reporting delays.
12. Who is this helping? (NYT): “Amazon said Wednesday that it would temporarily halt its operations in France after a court ruled the company had failed to adequately protect warehouse workers against the threat of the coronavirus and that it must restrict deliveries to only food, hygiene and medical products until it addressed the issue.” 

April 16 7:28 AM When Will The Riots Begin? Protests against lockdowns have begun. Crucial.

April 16 7:26 AM PPE Shortages and the Failure to Increase Prices. Vital. Anti-price gouging rules are inhibiting supply. An interesting new mechanism: usually people won't pay for stuff until it's delivered. But if you have to ramp up production 10x, you don't have working capital to buy supplies. higher prices provide working capital. There is a rising supply curve everywhere.

April 16 2:59 AM (!) One reason why food intended for restaurants is not reallocated to supermarkets We've been puzzling about that here. Why are farmers throwing away food? At our dinner table the answer was obvious -- some regulation is getting in the way. But which one? Food labeling is an obvious one. You can't just sell, you know, food, in a food store. "I’ll say it again: America’s regulatory state is failing us."

April 16 12:22 AM Supply curves slope up round 1. Why you get more tests if you agree to pay higher prices. (As I've written a few times, ponder that we are spending a trillion dollars a month on stimulus yet worrying about "price gouging" and haggling over $40 tests and $1 face masks.)

I can't keep up! I can barely read this fast.

Financial pandemic

The headlines are on the disease, the shutdown, and the hoped-for safe reopening. It's time to pay some attention to the financial side of the current situation, and the Federal Reserve's immense reaction to it.

Disclaimer: do not read in this post criticism of the Fed. Maybe the world would have ended if they had done things differently. But it is important for us who study such things to understand what they did, what beneficial and adverse consequences there are, and how the system might be set up better in  the future.

Big picture: We face an extremely severe economic downturn, of unknown duration -- it could be a V,  U, or L. If it is not a V shaped in months, there will be a wave of bankruptcies from personal to corporate, and huge losses all over the financial system. Well, earn returns in good times and take losses in bad times, you may say, and I do, more often than the Fed does, but for now this is simply a fact.

Our government's basic economic plan to confront this situation is simple: The Federal Reserve will print money to pay every bill, and guarantee every debt, for the duration. And, to a somewhat lesser approximation, to ensure that no fixed-income investor loses money. 

I reiterate, the point of this post is not to criticize. If you are reading economics blogs, you like me probably have a nice work-from-home job that still pays some money. This is not what's going on. From a combination of voluntary and imposed social distancing, the economy is collapsing. As I detailed in an earlier post  20 million people, more than 1 in 10 US workers, lost their jobs in the first month of this shutdown. That's more than the entire 2008 recession. In 3 weeks. 1/3 of US apartment renters didn't pay April rent. Run that up through the financial system. Most guesses say that companies have one to three months of cash on hand, and then fail. We'll look at signs of financial collapse in a bit, that the Fed reacted to. If you want to know why the Fed hit the panic button, it's because every alarm went off.

Pay every bill? Yes, pretty much. This is not "stimulus." It is get-through-it-us. People who lost jobs and businesses that have no income can't pay their bills. When people run out of cash they stop paying rent, mortgages, utilities, and consumer debts. In turn the people who lent them money are in trouble. Businesses with zero income can't pay debts (just why debts are so large is a good question to keep track of), employees, rent, mortgages, utilities. When they stop, paying they go through bankruptcy and their creditors get in to trouble. If you want to stop a financial crisis, you have to pay all the bills, not just some extra spending cash.

And that's pretty much the plan. There will be unemployment insurance, with 100% replacement of wages, for people who lose jobs, so they can pay rent, mortgages, utilities, and consumer debts. The Small Business Administration will make forgivable loans to businesses. Bailout plans are in place to make sure industrial companies like Arlines do not file for bankruptcy. (Much of this money is stuck in snafu, but that's the plan if not the execution.) And, where the big money is, the Fed is propping up corporate bond, municipal bond, treasury, money market funds, and other markets. I'll survey the programs below, this is big picture for now.

Printed money? Yes. Start with the Treasury. The Treasury wants to spend $2 trillion in the first stimulus bill. Where is that money coming from? In normal times, that would mean selling $2 trillion of treasury bond and bills. But who has $2 trillion of extra income lying around that they want to use to buy treasury debt right now? Yes, the new treasury debt has to come from a new flow of savings. Well, you can argue if that's there or not, but you don't have to. The Fed is buying more debt than the Treasury is selling. 

When the Fed buys Treasury debt, it prints up new money, and gives it to the holder of the Treasury debt. (I will say "printing money" as that is clearer. The Fed actually creates new reserves, accounts banks have at the Fed, by flip of an electronic switch. Banks can convert reserves to cash and back at will.)  On net, if the Treasury borrows and spends the money, and the Fed buys the Treasury debt, the government as a whole has printed up new money to spend. That's what's going on now. 

From the March 4 and April 8 Fed H.1 data, we learn that the Fed held $2,502 billion and $3,634 billion Treasury securities on those dates, an increase of $1,132 billion.  From the Treasury debt to the minute page, we learn that debt held by the public (including the Fed) rose from $17,469 billion to $18,231 billion -- a (huge) rise of $762 billion. $9 trillion at an annual rate. The Fed bought all the Treasury debt, printing new money to do it, and then some. On net, the government financed the entire $762 billion by printing new money and printed up another $370 billion to buy back that much existing treasury debt. 

The UK is abandoning pretenses. Bank of England to directly finance UK government’s extra spending writes the FT. Rather than have the government sell to the market, and then the bank buy it, the bank will now print money for the government to spend, and the government will print treasury debt to give to the bank in return.

(Who cares you may ask? The US Fed is not legally allowed to buy from the Treasury. The Treasury must sell in private markets to establish the interest rate, i.e. the price of the debt. If not, there is an inevitable temptation to say that markets are "impaired" or "illiquid" requiring too high rates, and thus the Fed buys at artificially low rates and high prices. The laws against inflationary finance are pretty thoughtful.)

The new lending programs are explicitly financed by the Fed printing up new money to do so.

The Fed and Treasury are teaming up to provide trillions to lend money to businesses and banks, and to buy assets including  money market funds, corporate bonds, municipal bonds, mortgages,

Now where do these trillions come from? Answer, in short, the Fed simply prints them up. It prints up the new money, and gives it to a business or bank or uses it to buy assets. 

A bit longer explanation 

In normal times, the Fed creates money (reserves) by buying Treasury bills. It has an asset -- the Treasury -- and a liability -- the money. The money is backed by Treasurys, a good principle of non-inflationary policy. That's the simple version of which  the Fed just did a trillion. 

When the Fed lends money to a bank or a company, the Fed likewise prints up money, gives it to a company, and counts the company's promise to pay back the loan as the corresponding asset. You can see the danger. The Fed is supposed to make only safe loans, to guard against inflationary finance, and to keep the Fed politically independent. Printing money to hand gifts to well connected firms and politically powerful interest groups is dynamite, and an independent agency will not stay independent long if it does so. 

For this reason the Fed and Treasury work together. The Treasury agrees to take the first tranche of losses, so the Fed can say this is a safe loan. Jay Powell was, as usual, clear on this. 

I would stress that these are lending powers, not spending powers. The Fed is not authorized to grant money to particular beneficiaries. The Fed can only make secured loans to solvent entities with the expectation that the loans will be fully repaid

What happens if the loans are not paid back? Well, in the first 5 to 10%, the Treasury takes the loss.  But right now, the Treasury gets its money from the Fed. So it really comes back to printed money anyway. If losses are so severe that the Fed loses a lot of money, the Treasury will have to recapitalize the Fed with a gift of Treasury bills. 

So, if the loans are not paid back, one way or another, we end up with that much more outstanding Treasury debt, either owned by the Fed and money outstanding, or owned by people. 

But this Fed vs treasury business, while important inside baseball for Fed independence and a bunch of issues on how the plumbing works, is really beside the point. The Fed and Treasury right now are, together, printing up trillions of dollars -- $4 -$6 trillion is the current guesstimate, which assumes a short sharp recession -- and handing them out. Most of it is "loans" which the Fed and Treasury hope to recoup. Then they can reduce the amount of money left outstanding. 

Is this really lending? 

As Jay Powell emphasized, the current vision is that most of the current support is lending, not spending. The Treasury kicks in something like $400 billion which really is spending, the anticipated loan losses (companies that don't survive) and forgiveness (programs that promise to forgive the loan if the company meets employment or other goals). The Fed lends $4 trillion on top of that, and gets its money back. The government as a whole has only spent $400 billion when its over, and the new debt (money) is soaked up again by repayment. 

But is this really lending or just spending?  Well, in the short run it's lending, but if the recession lasts more than a few months it will turn in to spending.

Companies have no income but must pay rent, debts, (interest on their corporate bonds and bank loans used to purchase now idle plant and equipment), utilities, skeleton staff, etc. Local governments are in a similar bind. They borrow to cover this cost. What's wrong with that? 

Well, borrowing usually corresponds to a productive asset, to an increase in value. If a bakery borrows to buy an oven, the bakery will make more bread, and use the additional profits on the extra bread to pay off the loan. If it doesn't work out, the oven is a real asset, collateral that the bank can sell to get some of its money back. A city borrowing to build a highway gets more tax revenue from greater activity to pay off the loan. 

But there is no economic value to these loans. These are consumption loans, stay-afloat loans, preserve-the-business loans. They are loans against future profits, but not additional future profits. They are a transfer of the franchise value of the firm to the lender. 

So, first, the firm clearly at some point is better off shutting down than promising its entire profit stream to a lender just for the right to reopen someday. Second, the government, already inclined to forgive, say, student debt, has every reason to forgive these "loans" as well. The business "loans" explicitly promise forgiveness if the government keeps workers on board. When we are in a sluggish recovery, and businesses are saying "well, I would hire more people, but we have all this extra debt because we took Fed loans to keep our employees fed while we were shut down," let's see just how tough the government is going to be on repayment. 

So, in a matter of months, these loans turn to gifts. The $4 trillion Fed lending package winds up as $4 trillion permanently added to Treasury debt. 

Does this mean inflation? 

You would think that, if the Fed and Treasury are going to print up something like $1 trillion a month of money to pay everyone's bills and prop up markets for the duration, we would be heading for inflation, soon. 

No, or at least not immediately. Reserves pay interest. Reserves are just another form of Treasury debt. (Reserves that pay interest is one of the best innovations of recent decades, and Kudos to Ben Bernanke and everyone else involved.) 

So why does it matter? Couldn't the Treasury just print up Treasury bills, sell them for reserves, hand out the reserves, collect loans in due time and retire the Treasurys? In the short run it does matter, which should send a few shivers up our spine. Apparently the Treasury had a hard time finding willing buyers. So printing up the reserves directly made a difference. So, the Fed ends up with a loan "asset" on its balance sheet against reserves, rather than the Treasury with that loan as an asset on its balance sheet against Treasury bills. Conveniently, also, reserves though equivalent to Treasury debt are not counted in the debt limit along with many other contingent liabilities. 

In the long run it does not matter. The Fed and Treasury print up reserves, lend it to Joe's Laundry; Joe pays his mortgage; the mortgage company pays its investors. If those investors are happy sitting on reserves (bank accounts backed 1:1 with reserves on the margin), it sits. If they are not, which would be the beginning of the inflationary process, the Fed can just raise the interest rate on reserves until they are, really really transforming reserves to Treasury debt. Or the Fed can give them some of its stock of Treasurys and so on up the reserves. 

With abundant interest-paying reserves, reserves and Treasury debt are almost exactly the same thing, and in roughly functional markets, what matters is their total supply, not reserves alone. Inflation is a danger, but from the total quantity of government debt, not its split between reserves and  bills. Inflation comes basically if the US hits a debt crisis. 

(That is, so long as the Fed pays market interest on reserves, and lets the market basically have as much or as few reserves as it wants. If the Fed, and Treasury, start worrying about interest costs of the debt, and do not pay interest on reserves and do not allow people to convert to Treasurys, then inflation comes sooner. )

But we're looking for sure at raising US debt from $22 trillion to $27 trillion, likely hitting 150% of GDP if this is a short and swift recession. It could be much larger if the recession goes on a year or more. Is there a demand for that much more treasury debt in the long run? Is there a flow of that much new saving that people are willing to park with Uncle Sam? How much more can markets take? So the chance of a global sovereign debt crisis and inflation is not zero -- but not centrally from the fact that it's currently financed by printing money. I'll come back to this issue in detail later. 

Questions. 

First, how long can this go on?

As you can see, the viability of this whole plan depends on a short recession. The Fed is printing up something like $1 trillion per month. If the recession ends up being L shaped, those numbers will ramp up as reservoirs of private cash dry up. A few large company bailouts, a few more "dysfunctional" markets turn to the Fed to buy everything, and so on. The  IMF wants  $1.2 trillion to bail out emerging market economies. After 3 weeks. That will get worse. State and local governments, already facing pension crises, are gong to be toast when sales and income tax receipts collapse. Bear Stearns, Fannie and Freddy, AIG...

Where is the limit? Perhaps the peasants with pitchforks, remarkably absent so far, will revolt. Perhaps the willingness to hold interest-bearing reserves or US Treasury debt will find its limit after $10 trillion. Or $20 trillion.

At some point, people who bought risky, high return debt, and earned nice returns on the way up, will have to bear some of the genuine economic losses. There is no magic. Government debt is paid back by taxes. (If you think that law has been repealed by MMT or r<g, I'll disabuse you of that in an upcoming post.) Trillions will be spent. Either taxpayers pay it, or creditors pay it. 

Second, isn't there a bit of moral hazard here? Now, you may say, nobody asks about moral hazard in a foxhole. But at some point we have to address the moral hazard. Half of these interventions were things done in 2008, and we said no, never again, we'll pass a mountain of regulations to control moral hazard. Remember "no more bailouts?" Especially money market funds? And here were are, one week into it and airlines are too big to fail and money market funds need the Fed to stop from breaking the buck. At a minimum we can look at what the Fed has done, remark on how the post 2008 controls on moral hazard failed, and at least think about how we might avoid being in exactly the same  pickle in 2032.  We can also once again Monday morning quarterback and suggest how things might be done in a way to diminish the moral hazard. At least we can get a better playbook for next time.

I will look at both these issues in detail in upcoming blog posts.

A happy thought on super-spreaders

From one of my super-smart colleagues.

The key is to get R0, the average number each infected person gives it to, below one. If that is done, the virus dies out.

R0 has a fat tail. Almost all spreading is done by a few super spreading people in super spreading events and activities. Cut those out and the problem is gone. Keeping the rest of us at home is a waste. (Latest, discovery by my wife. Dog groomers are shut down. One cutter, one dog, one store. No)

Happy thought: to the extent that super spreaders are super-spreading people, people with particularly bad habits, or people in particularly exposed jobs, they are most likely to get it and become immune. Thus, super-spreading naturally tails off on its own, and the average reproduction rate falls on its own. If the small herd of super-spreaders gets immunity, that helps the virus to die out.

This is one case I've heard of that heterogeneity in R0 rates affects the average that is tracked by most epidemic models.

How soon does it end?

How soon does it end? This is a big question which models can help us with.

Jesús Fernández-Villaverde and Chad Jones are working on estimating and simulating a epidemiological (SIRD) model of Covid-19. The numbers are based entirely on numbers of deaths, which eliminates much data uncertainty. It includes an initial spreading rate (R0), and the introduction of public policies that lower that rate. One may object to economists treading in these waters but economists (especially of such great talent) are really good at fitting models to data.

Here is how the model fits New York daily deaths per million. The three lines reflect three different possibilities for the death rate, 0.1%, 0.3% and 0.5% of infected people. You can see how the three death rates fit about the same up to now (the other parameters get reoptimized), but differ on the forecast for the future. The cumulative death rates under the three assumptions are quite different, about 800, 1200 or 1500 per million.

But what struck me is how close the peaks are -- no matter what parameters you pick, the peak is between April 11 and April 20. By mid-May things are well under control, and it's over by June. This is a really hopeful simulation for our big V U or L discussion.

The key input to seeing it over is indeed, "bending the curve," or the peak in sight.  Here is Italy,

Italy is clearly past the peak, no matter what parameters you use, and will be over in a month.

Here is another insightful plot, for New York

The lines are forecast based on data made 1,2, 3, 4, out to 7 days ago (red). The time of the peak is pretty well known.

But here is California:

California is at a much lower level -- note the vertical scale. 2 deaths per million not 50 in NY. But we don't have that signature of exponential growth, growth slowing and then a peak. So the progression of the forecast rom red to tan (extraordinary good news) is very sensitive to the data from the last 7 days, and you can see it's a bit noisy.

In all these simulations, the big unknown is the total death rate. The speed of the event is still in months. On current data, New York ends up with 21% ever infected, and California with 1% ever infected, and total deaths 0.3% of that. But the infection always comes and goes in a matter of two months. 

This seems like great news for the V, U, L, debate. Back to work in June. There is a big assumption here. Jesús and Chad assume there is an initial reproduction rate, and policy intervenes to bring that down to a lower level. For New York, those are 4.9 and 0.9. (How many people each sick person infects.) For California, 4.0 and 1.0. They then assume that the new lower reproduction rate stays put.

If "reopening" in California means going back to a 4.0 reproduction rate, in a population that 99% of people still are uninfected, we just start right back again.

So where is a rosy economic scenario that this is over by June and the economy can get going again? Absent a vaccine, it depends on public health being able to take over form blanket shutdowns, to keep R0 below one in a population with very few (but not zero) cases. 

If we just reopen there will be a second wave, or an endless half open economy. Public health -- lots of testing, tracing, isolating -- allows you to keep R0 low when there are relatively few cases without shutting down the economy.

So I think Jesús and Chad's simulations offer great hope that the economic calamity can end quickly if the public health infrastructure is in place to do what it so massively failed to do in January.

(The slide deck and paper will be up soon on Chad and Jesús websites. I saw it at our Monday zoom lunch seminar. Thanks to Chad and Jesús  for sharing the slides.)

V, U or L? Three views

Will the recovery be V shaped, U shaped or L shaped?

The 1918 influenza stood in most economists' memories as the paradigm -- a short, small V shaped slowdown, despite massive mortality. But 1918 was different. People and public policy went about their business ignoring the death toll to a large extent.

François Velde writes about the 1918 Influenza.

Burns and Mitchell (1946, 109) found a recession of “exceptional brevity and moderate amplitude.” I confirm their judgment by examining a variety of high-frequency data. Industrial output fell sharply but rebounded within months. Retail seemed little affected and there is no evidence of increased business failures or stressed financial system... Interventions to hinder the contagion were brief (typically a month) 

Of course the fact that interventions were brief has a lot to do with the mildness of the recession. Still,  it was on this historical evidence that most economists thought in February that this might be the great vacation.

I then use high-frequency cross-sectional data to confirm the visible but brief impact of the epidemic and of the intervention measures (closings of certain businesses) that were adopted at the time. Banking data shows a financial sector functioning as it should (increasing loans). Conspicuously, there is no evidence of stressed balance sheets in the nonfinancial sector: business failures were on an uninterrupted downward trend, and cross-sectional data fails to find any effect of mortality....

Here is the picture of a short sharp V shaped 1918 -- followed by the deeper but equally V shaped 1921, not influenza related

And here is the absence of business failure, all before the CARES act, stimulus, massive Fed lending, and so forth. 

François constructs

an index of local business conditions from weekly qualitative reports and use it, along with measures of payments volumes, to examine if the speed with which economically costly interventions were put in place made a difference in economic outcomes. I find clear evidence that interventions changed the dynamics of the epidemic and affected economic activity by reducing the number of infected, though broader effects (through a reduction in demand or activity) proves elusive.

Things are not always the same

[Interventions] imposed mostly by cities but sometimes at the state level, took a wide variety of forms ranging from shutting down public gatherings and crowded places to staggering business hours, closing schools, imposing quarantines for infected people, requiring masks, etc. No intervention went as far as closing non-essential businesses, as have the lockdowns of the 2020 pandemic.

Velds goes on to make an important point. There are lots of pandemic macroeconomic models being built at breakneck speed right now. They should fit not only this one -- a massive recession -- but also fit the milder earlier ones. 

*************

Sergio Correia, Stephan Luck and Emil Verner write Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu 

Looking across the US, 

more exposed areas experience a sharp and persistent decline in economic activity. The estimates imply that the pandemic reduced manufacturing output by 18%. ...

This differs a bit with Velde. In part they emphasize the longer lasting cross sectional effects, but I'm not sure if that totally accounts for the difference. 

We find that cities that intervened earlier and more aggressively do not perform worse and, if anything, grow faster after the pandemic is over. Our findings thus indicate that NPIs not only lower mortality; they may also mitigate the adverse economic consequences of a pandemic.

This is surely true. The way to nip exponential growth in the bud is to stop it early.


************

Scott Baker, Nick Bloom, Steven J. Davis and Stephen J. Terry COVID-Induced Economic Uncertainty are much more pessimistic. They use their measures of economic uncertainty, derived from newspaper reports and (panicked) financial markets, fed through a model that relates uncertainty to economic outcomes, to forecast a long, deep recession.

Here too, the past may or may not be a guide to the future. The hope is for a swift all-clear, people return to the jobs they had and businesses reopen, without the agonizingly slow dynamics of a usual recovery. Well, that's the hope.

**************

Robert J. Barro, José F. Ursua, Joanna Weng "The Coronavirus and the Great Influenza Epidemic" look across countries,

Regressions with annual information on flu deaths 1918-1920 and war deaths during WWI imply flu-generated economic declines for GDP and consumption in the typical country of 6 and 8 percent, respectively

The death rates were enormous relative to now

150 million deaths worldwide when applied to the world’s population of around 7.5 billion in 2020. 

and they note that we are choosing much more economic dislocation to save lives.

However, extreme mitigation efforts—such as widespread cancellations of travel, meetings, and major events—will themselves contribute to the depressed economic activity.

I'm not sure what implications to take for our question.

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SNAFU

We should not be shutting down the economy. Where we are is a sign of a great loss of bureaucratic competence, of state capacity. The old joke that the federal government is an immense insurance company with an army has never been so true.

Our government has,  apparently, the capacity to spend two trillion dollars in a month. But, with three month's notice, it cannot procure 50 cent face masks or plastic face shields (properly certified and regulated). (Actually, unemployment insurance and SBA snafus suggest it cannot even disburse the rivers of cash.)

We lack the basic state capacity, bureaucratic, technical infrastructure for anything more nuanced than blanket shut downs -- no trace, track and isolate, no apps to check temperature and symptoms, no commonsense that maybe (say) gardeners and tree trimmers can work now. It took Walmart to figure out that taking employee's temperature every morning might be a good idea.

I hope a lesson that comes out of this is the need to clean up America's bloated regulatory state, and to re construct a competent effective bureaucracy.

To these general points, Veronique de Rugy writes on  The monumental failure of the CDC,

The lack of preparedness at every level of government (federal, state, and local) has nothing to do with a lack of funding or inadequate staffing. Instead, it has everything to do with governments’ bloat, mismanagement, cronyism, and poor focus.  ...

“CDC officials botched an initial test kit developed in an agency lab, retracting many tests. They resisted calls from state officials and medical providers to broaden testing, and health officials failed to coordinate with outside companies to ensure needed test-kit supplies, such as nasal swabs and chemical reagents, would be available, according to suppliers and health officials…

“This was kind of a perfect storm of three separate failures,” said Tom Frieden, who directed the CDC from 2009 to 2017, citing the botched test, overstrict FDA rules and sidelined private labs.”

Veronique's piece contradicts the common conservative view that our government got incompetent because it spent so much money on programs -- writing checks to voters -- that no money is left for core institutions.

 the agency’s poor record and its lack of preparedness has nothing to do with a lack of funding. From 2004 to 2018, total CDC spending grew by over 30 percent, from $8.3 billion to $11.1 billion.

Unfortunately, the vast majority of this growth in spending—shock!—did not go to pandemic prevention and protection from COVID-19. 

For instance, funding for its National Center for Emerging and Zoonotic Infectious Diseases—which aims to prevent diseases like Ebola—received only $514 million in 2018, a tiny sliver (less than 5%) of total CDC funding. And less than half of that $514 million went to emerging diseases like COVID-19. The rest of that budget is spent on stuff like chronic fatigue.

Meanwhile, funding for the CDC’s chronic-disease programs—which aim to prevent smoking, alcohol consumption, and poor diets—received nearly $1 billion over that same time, almost double the funding for infectious-disease prevention. As Michelle Minton at the Competitive Enterprise Institute notes in a must-read piece, more money goes to efforts like “environmental health ($180 million), injury prevention ($270 million), and occupational safety ($330 million).” All these projects are also funded by other agencies.

And, of course, let’s not forget the large amount of time the CDC (along with its companion in failure, the FDA) spends on alarming everyone about youth vaping. It is not an epidemic, it’s not contagious but it’s certainly got plenty of attention from the CDC, and the FDA. Isn’t it obvious now that these busybody government bureaucrats should have focused their efforts instead on fighting and preventing actual, real-world epidemics—you know, of the contagious type. 

This is a picture of unsupervised bureaucratic drift,  not lack of money

Brett Stephens writes of bureacratic bungling in the New York Times. 

A lot of poor kids get lunch at school, a pretty important source of regular meals. School is closed.

The U.S.D.A. didn’t have any trouble responding to school closures by switching to summer feeding programs. And Congress knew enough to give the department authority to waive some of the regulatory requirements. But,.. “Every waiver has layers and layers and layers on it.”

“To get a waiver each district has to apply to the state,” she notes. “The state has to decide whether to accept it. If they agree, then they have to apply to the U.S.D.A. If the U.S.D.A. says yes, the state can get the waiver, the district can get the waiver, but then the state has to interpret how you do it.”

Example: Oregon applied to the U.S.D.A. for an area-eligibility waiver so it could provide food for needy families living in non-poor areas. The department allowed the waiver, with the requirement, Wilson says, that each school district would have to work with a state agency “to develop a plan as to how they are going to target the most-needy students.”

Brett links to the  "F.D.A.’s almost-comical mishandling of an effort to roll out coronavirus test kits" here, and summarizes

First the F.D.A. approved a flawed test. Then they stymied an effective test by requiring its developer to submit his request not only electronically but also mailed in paper and via thumb drive. Then the F.D.A. demanded that the developer see if his test worked against other coronaviruses. Then the F.D.A. shut down a testing regime developed by the Seattle Flu Study because it lacked the correct licensing requirements.

Congress also had to overturn F.D.A. regulations in order to permit hospitals to purchase N95 masks previously approved only for industrial use. The country may need billions of such masks now. But as Reason magazine reported last month, federal regulators have told one would-be manufacturer that certification and approval might take between 45 and 90 days.

And this is government operating in an emergency. 

Dan Frosch, Deanna Paul and Ian Lovett write in the Wall Street Journal the story of Abbott Labs' amazing 15 minute coronavirus test:

After conducting a bulk purchase with Abbott, the federal government this month gave every state except Alaska 15 devices and 120 cartridges, regardless of its population or severity of its coronavirus outbreak.

In Illinois, where Abbott Laboratories is based, Gov. J.B. Pritzker said he spoke to the company more than a week ago and thought he had an agreement to conduct 88,000 tests a month, or about 3,000 tests a day. He subsequently learned that the federal government was taking over purchasing and distribution of the tests.

Instead, Illinois received 15 Abbott machines and 120 cartridges. “That’s eight tests per machine for all of Illinois” 

My italics. Lots of people are touting the need to "centralize" critical supplies, to stop states "competing" over them. Here is a look at how that's going to work out.

We are relying on the amazing creativity of American scientists and industry. The knowledge that the federal government is going grab your market cannot be salubrious to innovation and supply.

WWII generals fought each other viciously for supply too. Centralized allocation does not increase amounts.

The economy

V shape L shape or U shape? How far are we from financial collapse?

17 million people have filed for unemployment. In the first three weeks of the shutdown alone! The current rate 6 million per week. This is an astonishing number. The US labor force is about 165 million. One in 10 are out of a job in three weeks. 

In one sense this may not be as bad as it seems. I hear more and more anecdotes that companies and workers are reacting to the huge expansion of unemployment insurance (including self-employed and gig workers) by firing, laying off, furloughing workers that retain an attachment to the firm, and both sides are ready to get back to the same job quickly. So "unemployed" means "not working" and "we'll take the Federal government up on the offer to pay wages for a while."

This is arguably preferable to companies borrowing borrow money to pay the workers, which might have to be repaid, and has advantages over the European system in which the government pays companies to pay people who cannot work.

(In some cases, employees even keep health insurance. Bernie Sanders is right that the virus "has exposed for all to see how absurd our current employer-based health insurance system is." He is wrong that the only alternative is government-provided health. Individual, portable, guaranteed-renewable health insurance sticks with you if you lose your job, just like car and home insurance.)

In another sense, though, it is horrific news -- it means that already the employers of 1 in 10 people in the US labor force are shutting down completely. Those employers may not be around if the virus lasts very long.

Update: Olivier Coibion, Yuriy Gorodnichenko, and  Michael Weber look more closely at the numbers, with really depressing results:

Job loss has been significantly larger than implied by new unemployment claims: we estimate 20 million lost jobs by April 8, far more than jobs lost over the entire Great Recession. Second, many of those losing jobs are not actively looking to find new ones. 

So unemployment, defined as those without jobs but looking for jobs will not rise as much or measure the economic damage. In some sense that is optimistic, reinforcing the story that they are just waiting at home for their old jobs to come back. But the direct measure is less comforting.

Third, participation in the labor force has declined by 7 percentage points, an unparalleled fall that dwarfs the three percentage point cumulative decline that occurred from 2008 to 2016. Early retirement almost fully explains the drop in labor force participation both for those survey participants previously employed and those previously looking for work.

If so, those workers are not coming back. Still, people's responses to questions whether they are looking for a job or would take one if offered change quickly over time.

Nearly a Third of U.S. Apartment Renters Didn’t Pay April Rent.

Some tenants will be temporarily protected from eviction... unpaid rent could set off a chain of events that first cause commercial mortgage defaults, zapping investments in bonds backed by those mortgages.

Well, first many landlords are not big businesses but moms pops and small investors who put their life savings into a building, with a mortgage. They default, then whoever holds their mortgage defaults and up the line we go.

Again, it may not be all that bad. When the government announces that evictions and foreclosures are stopped, not paying rent may be a first place to save some cash. And just who is your landlord going to rent to anyway? But it is a signal of just how many people are in some sort of financial distress and again adds up to catastrophe in a few months.

Mortgage servicers are the next to go. Mortgages are no longer largely held by banks. If you don't pay your mortgage, as you are now allowed to do, the mortgage service company still has to pay its creditors, who typically hold mortgage backed securities.

If 25 percent of borrowers fail to make their mortgage payments, the industry would need $40 billion to cover three months of payment....

Bright, who formerly managed the $2 trillion portfolio of government-run mortgage financier Ginnie Mae, said he believes the Fed will come through with an emergency lending program for the industry.

“Even though that language wasn’t included [in the Senate bill], I do think it’s likely that this could be part of [the Fed’s Term Asset-Backed Loan Facility Program] in the end,” he said.

Federal Housing Finance Agency Director Mark Calabria...said this week in a Bloomberg TV interview that he was confident that large banks would continue to extend credit to mortgage servicers for the time being....

Still, he said, “if we get to a situation where this goes longer than two months, absolutely there’s going to need to be a bigger solution.”

Broeksmit said some mortgage companies won’t make it that long,

The article goes on to ask for help from the Fed.

In all three cases, our government's reaction is basically that the Fed will print up money to pay everyone's bills for the duration, subject only to the usual snafus at unemployment offices, bank regulations, SBA offices in actually spending the money. Just how long can that last? A topic for an upcoming post.