1. Adam Tooze argues that the Fed should become the global leader of last resort of dollar financing.
For the second time this century, the world is facing an acute shortage of dollar funding. This is a big problem: An enormous amount of global financial activity depends on the use of the dollar. If we are to contain the fallout from the crisis, America’s central bank must act as a lender of last resort not just to America’s financial system but also to the entire world’s. The good news is that the Federal Reserve is taking its responsibility seriously: It is funneling dollars to central banks around the world. But is the Fed fighting the last war?... In 2008 the dollar shortage was confined largely to the banks of Europe and America. That is the Fed’s historic comfort zone, the cradle within which it was born a century ago. The coronavirus crisis explodes that 20th-century framework and poses the question: How does America’s central bank supply dollar liquidity to a polycentric world economy?...
In 2007, a new type of dollar shortage emerged — not a shortage of official reserves, but a shortage on bank balance sheets. Europe’s banks had taken on huge amounts of American subprime debt... The Fed responded first by lending money directly to the European banks in New York and then by using the swap lines to funnel dollars to them indirectly by way of their local central banks. For a brief moment in early December 2008, the swap lines to foreign central banks were the largest single item on the Fed’s balance sheet. Altogether 14 banks were attached to the Fed, including major emerging markets like South Korea, Brazil and Mexico, whose banks, like the Europeans’, had joined the dollar-based global financial system. In 2013, the agreement to swap was made permanent.
How is this time different?
As panic has swept through financial markets in the last two weeks, investors have begun seeking safety in cash — and above all in dollars... on Thursday the Fed widened the swap network to include all 14 of the central banks it supported in 2008... But as the pandemic’s impact on the world economy deepens, will the swap line system of 2008, with its echoes of the Cold War era, still do the job? Three things have changed since 2008. First, dollars are being used on a new scale by new financial actors. Second, the balance of the world economy has further shifted from the European Union-United States-Japan axis toward emerging markets. And third, the politics of the world economy have become far more antagonistic...
In 2008, European megabanks were the problem. Today the pressure is on Japanese and Taiwanese life insurers, pension funds and postal banks, which have made huge purchases of American corporate bonds that are now collapsing in value because of the shutdown of global economic activity. These financial institutions are not umbilically connected to the swap lines in the way that banks in London or Paris were. As the Fed struggles to calm the markets, the last thing it needs is for these institutions to unload their portfolios of American assets... the foreign debts of China’s businesses come to $1.3 trillion. As the global scramble for dollars begins and the American currency rises in value, those debts become less sustainable. That risks unleashing a chain reaction... Now the U.S. Treasury market is shaking, and the relationship between the two counties — in an era of viral conspiracy theories and trade wars — has sharply deteriorated... The last thing the world economy needs is for Beijing to liquidate any of its portfolio. It would be a huge, perhaps politically impossible step to extend a swap line from the Fed to the People’s Bank of China. In its absence, as Brad Setser of the Council on Foreign Relations has suggested, the Fed may need to consider allowing China to borrow against the collateral of its huge Treasury holdings... The outflow from the emerging markets in recent weeks has been more rapid than ever before in history. To stop further losses, it may be necessary to adjust the swap line system. That will require imagination — and if not political cover from the White House and Congress, then at least forbearance.
2. Greg Mankiw outlines what the US should be doing,
Fiscal policymakers should focus not on aggregate demand but on social insurance. Financial planners tell people to have six months of living expenses in an emergency fund. Sadly, many people do not. Considering the difficulty of identifying the truly needy and the problems inherent in trying to do so, sending every American a $1000 check asap would be a good start. A payroll tax cut makes little sense in this circumstance, because it does nothing for those who can't work. There are times to worry about the growing government debt. This is not one of them. Externalities abound. Helping people over their current economic difficulties may keep more people at home, reducing the spread of the virus. In other words, there are efficiency as well as equity arguments for social insurance. Monetary policy should focus on maintaining liquidity. The Fed's role in setting interest rates is less important than its role as the lender of last resort. If the Fed thinks that its hands are excessively tied in this regard by Dodd-Frank rules, Congress should untie them quickly.
3. Tyler Cowen quotes Scott Ellison who proposes the most radical measure, stopping time itself,
I propose temporarily stopping time. This means that today’s date, Tuesday, March 17th, 2020, will remain the current date until further notice. This also means that everything that happens in time (e.g. mortgage due dates, payrolls, travel bookings, stock market trading, contractor gigs, concerts, sporting events) will be paused. It also means that all of these events remain on the books, and will continue as planned once time is resumed… We’re spending trillions of dollars to keep time going (e.g. sending every American $1,000 so they can pay their rent, sending airlines $50 billion so they can pay their jet notes, providing billions to banks to cover distressed assets), but none of this really relieves the need to keep going out and working and thus further spreading the virus. What’s worse is that, in spending all this money to keep time going, there’s no guarantee that the economy will be there to take back up the baton once government payments stop.
4. John Cochrane talks about stopping time and debt forbearance,
The central problem is really a coordination problem. A owes B money. A is shut down so can't pay. B understands and would be happy to wait until the crisis is over. But B owes C money, so can't wait. And on down the line it goes. It's like daylight savings time. We could individually decide to move things an hour earlier in spring, but mostly A wants to show up at work when B will be there. There are lots of coordination problems like this, and a useful function of government is to solve them. But the economy is not completely shut down. Food and medicine need to keep going, and need to be paid! If we literally stop all payments, shutting down the ATM machines, credit card machines, and salaries of the 80% or so who will keep their jobs, we create an insane mess. So some clocks shut down and some others don't and now you have a mess on your hands... I think really this is a metaphor for widespread forebearance, and we can see a hint of this in what the government is already doing -- no evictions, urging banks to forbear loans, for example. Widespread debt forbearance in crisis is an age-old tradition.
5. Emmanuel Saez and Gabriel Zucman write about governments becoming the buyer of last resort to backstop demand
In the context of this pandemic, we need a new form of social insurance, one that directly targets and works through businesses. The most direct way to provide this insurance is to have the government act as a buyer of last resort. If the government fully replaces the demand that evaporates, each business can keep paying its workers and maintain its capital stock, as if it was operating under business as usual. To see how the notion of a buyer of last resort works, take the case of the airline industry. If demand drops by 80%, the government would compensate this missing demand, in effect buying 80% of plane tickets and maintaining sales constant. This would allow airlines to keep paying their workers and maintain their planes and equipment without risking bankruptcy...
A buyer-of-last resort policy cannot be implemented perfectly, but governments can come close. For the self-employed and workers such as Uber drivers, the government would replace lost earnings; this would be similar to unemployment insurance. For large businesses, government compensation would be conditional on businesses not laying off any workers. It is better for businesses to keep their workers even if they are temporarily idle so that business can resume quickly—without having the rehire new workers—once demand picks up. For government sectors such as education, when schools close, teachers should continue to be paid, and so on.
6. Sometime down the line, as among the first steps in restoration of normalcy, mass testing will have to be an important component. This is especially so given the likelihood of recurrence. Alex Tabarrok argues in favour of mass testing to fix the labour market.
7. John Authers points (HT: Ananth) to parma-bear Albert Edwards to flag whether the corona is the trigger for the great reversal in both equity and bond markets. Edwards' bet has been that the Ice Age will end with the reversal will happen when US yields will join others in the negative territory, stock markets hit lows, and the economy is desperate enough for governments to change track and create inflation by printing money.
This quote of Edwards is spot on
leverage was built up on the premise that nothing bad happens. And something very bad has now happened. Hence many of us believe that central bank actions over the last decade have made the current already bad situation much worse than it otherwise would have been.
And this, his prophecy, pre-corona,
I expected the anger of the populace and the populism it would engender would bring a transition in economic policy away from the increasingly discredited Quantitative Easing (QE), which I believe actually did very little good (in reviving the economy), but much bad (in that it exacerbated wealth and intergenerational inequality - helping to drive the rise in populism). Instead of more QE, I wrote that some variant of Helicopter Money such as the increasingly fashionable Modern Monetary Theory (MMT) would be adopted in some shape or form. It would in effect be the monetisation (of rapidly increasing public sector deficits) in all but name. It would not be announced with great fanfare. It would just be done.
Authers points to what could be the denouement,
With Republicans in Congress anxious to send out checks to all Americans, and Angela Merkel ready to expand the German deficit, it seems as though the case for helicopter money has suddenly become almost the undisputed orthodoxy. And that lines up with the Edwards belief that the regime would be “such a major event that it can only be implemented during a crisis.” The crisis is here, and the synchronized use of fiscal and monetary measures has, in Edwards’ words, begun to cross, if it hasn’t already, the Rubicon. “It was going to happen anyway, but it has come sooner than we expected. What now for The Ice Age?”
8. Rana Faroohar points to the lessons from the US bailout during the GFC which benefited Wall Street, and the largest institutions. Given the nature of the shock, she advocates focusing on poor people and small businesses. This assumes significance since the bailout currently under discussion in the US focuses on large companies.
Anyways, these suggestions are just as relevant for any country now,
Bailouts will again be needed now, given a market downturn that mirrors 1929 and an economic contraction likely to be sharper than during the previous financial crisis. But if we want capitalism and liberal democracy to survive Covid-19, we cannot afford to repeat the mistaken “socialise the losses, privatise the gains” approach used a decade ago. We have to start by protecting individual citizens and consumers... I am for the immediate cash payouts to individuals that have been suggested by many economists. In an ideal world, we would do that by means testing. But there is no time. We can recapture unnecessary payments the other side of the crisis, via the tax code... I would also love to see a federally underwritten three-month moratorium on all rent, mortgage payments and student debt payments, as well as government reimbursement for all healthcare costs associated with the virus....
When it comes to corporate bailouts, small and midsized businesses should come first. Over 96 per cent of them say that they are already feeling the pain of Covid-19, and over half claim they won’t be able to stay in business for more than three months in the current situation, according to a Goldman Sachs survey. They should be given grants, not loans. Many run tight margins as it is, and would not be able to survive any additional debt burden. These small and midsized businesses, which make up 83 per cent of US payrolls, should come first.
Underlining the extraordinary nature of the times, she writes,
Washington should also consider taking preferred equity stakes in such companies. Unlike the bank bailouts of 12 years ago, let’s socialise not just the losses but also the gains.
9. Guy Chazan writes why Kurzarbeit, or shorter work time, may be among Germany's "most successful exports",
Under the scheme, companies hit by a downturn can send their workers home, or radically reduce their hours, and the state will replace a large part of their lost income. A way for firms to hang on to skilled workers during a downturn, it “is one of the reasons why Germany recovered so quickly after the 2008-9 crisis,” said Anke Hassel, professor of public policy at the Hertie School in Berlin. With their tradition of strong welfare states, Denmark, Sweden and Norway have all followed Germany by introducing large subsidies for workers who might otherwise be laid off... Temporarily laid-off workers receive so-called “Kurzarbeitergeld” or “short-work money” from the Federal Labour Office (FLO), the agency which is also responsible for issuing unemployment benefit. The scheme promises them 60 per cent of their pre-crisis pay. Behind the scheme’s success was its well thought-out design: it was ramped up fast in the initial phase of the 2008 crisis “but phased out quickly in the subsequent recovery”, Mr Hijzen said. By contrast, other countries with similar programmes, such as Belgium and Italy, “use them more intensively in good times when they are less needed”. Meanwhile, in the Netherlands, “procedures are too complicated . . . to allow for a rapid take-up during economic crises”.
How are countries adapting it for the present crisis?
Kurzarbeit was one of the first tools the government grasped when the coronavirus crisis began to bite. Earlier this month the Bundestag rushed through legislation to expand the scheme and ease access to Kurzarbeitergeld: from now on, companies can register when just ten per cent of their workforce is impacted by an economic crisis, down from a third previously. The government now expects some 2.35m people to be drawing Kurzarbeitergeld, at a cost to the FLO of €10.05bn. The figure is much higher than the 1.4m who were receiving short-work money at the height of the global financial crisis. But the FLO, which is financed through contributions from workers and employers, has built up reserves of €26bn, much more than it had at the end of the 2000s. Other countries with short-time work schemes have also tweaked their rules since the crisis began. Spain recently modified its ERTE system to ensure that workers temporarily suspended from their jobs can draw around 70 per cent of their salaries as social security. France has also greatly expanded its existing chomage partiel (partial employment) system. Bruno Le Maire, the finance minister, said his €45bn of emergency measures included €8.5bn for two months of such state payments to laid-off workers... The UK is now moving to introduce a similar programme: on Friday, Rishi Sunak, the chancellor, unveiled a coronavirus job-retention scheme under which employers can apply for a grant to cover most of the wages of people who have been furloughed and kept on the payroll, rather than laid off. Such grants, the UK Treasury said, will cover 80 per cent of the salary of such retained workers, up to a total of £2,500 a month.
10. This is a good interview of B Ramkumar of TISS where he talks about the Kerala government's front-loaded spending based economic package.
Kerala’s economic package to address the coronavirus-induced slowdown is primarily counter-cyclical. Its first assumption is that the economic slowdown will be extremely harsh over the next three to six months. This is the period when government action has to actively intervene. So, what Kerala will do is to spend substantially higher – double or triple, depending on the sectors – during the next three months than what it would have spent during the same period in a normal year... other State governments should follow what Kerala has done. State governments can give tax relief to sectors that are acutely affected and spend more in the economy to protect jobs and livelihoods.
11. Interesting Goldman Sachs analysis in FT of stock-market crashes in response to different types of shocks,
Goldman Sachs’s chief global equity strategist Peter Oppenheimer has tallied 27 bear markets since the 1800s. He found that the average decline is 38 per cent, and that it has on average taken 60 months for US equities to return to their previous peak... “Structural” bear markets, which are triggered by deep-seated economic imbalances and financial bubbles unwinding, have on average meant a 57 per cent slump, and taken 111 months to return to their previous peak. The more garden-variety “cyclical” bear markets, where rising interest rates damp economic activity and depress corporate profits, have typically led to a 31 per cent peak-to-trough drop for the US stock market, and it has on average taken 50 months to recover. Meanwhile, “event-driven” bear markets are those triggered by some kind of one-off shock, such as a war, spiking oil prices, an emerging-markets crisis or a brief financial calamity like the Black Monday crash. This seems to fit the coronavirus scenario best, Mr Oppenheimer argues. Such bear markets on average lead to a more modest 29 per cent decline, and last just 15 months.
12. Among government rescue packages, the German and UK proposals have gone the farthest. Here is the UK package,
The government has placed the economy on a wartime footing to support businesses and people affected by coronavirus, announcing state-backed loans of at least £330bn as the outbreak escalates... The loans, made on “attractive” but unspecified terms, would allow firms to carry out fundamental day-to-day tasks such as paying wages and rent bills and buying stock... the chancellor said he would also provide tax breaks and other measures worth £20bn to protect companies and households suffering amid the economic collapse triggered by the virus. Cash grants worth £25,000 would be made to retail, leisure and hospitality firms to help them survive the period of turbulence. The smallest businesses in the country across all sectors of the economy will be able to seek grants worth £10,000. Business rates – taxes paid on commercial properties – will be scrapped this year for all companies in the retail, leisure and hospitality sectors.
This is in addition to a British version of Kurzarbeit announced in the Budget earlier, whereby government grants will cover 80% of the salary of retained workers, upto a total of £2500 a month.
The German package goes further, offering to support private companies with government equity infusions,
Mr Olaf Scholz will present plans for a €156bn supplementary budget for 2020 and a new €100bn economic stabilisation fund — to be known in German as the WSF — that can take direct equity stakes in stricken companies. It will also be equipped with €400bn in state guarantees to underwrite the debts of companies affected by the turmoil, bringing its total firepower to €500bn. Mr Scholz also envisages a €100bn government loan to KfW, the state development bank, which has been empowered to provide unlimited cash to businesses struggling with the fallout from the pandemic. Taken together, the supplementary budget, plus the €100bn for the WSF and the €100bn loan to the KfW amount to €356bn — or about 10 per cent of Germany’s GDP. The WSF will be in effect be a “reactivation” of Soffin, a government-backed vehicle set up in 2009 to bail out troubled banks. Soffin currently manages the government’s 15.6 per cent stake in Commerzbank, which it rescued during the global financial crisis. The WSF will not only underwrite companies’ debts but also recapitalise those experiencing financial difficulties due to the coronavirus turmoil, effectively paving the way for a wave of partial state takeovers.
Finally, underlining the extraordinary nature of the times, the US Federal Reserve has assumed the role of lender of last resort for all categories of borrowers, going even beyond what was offered in the 2008 crisis. FT writes,
The Federal Reserve has committed to unlimited purchases of US Treasuries and most mortgage-backed securities, as well a taking a historic step to buy corporate debt, as it seeks to shore up struggling companies and financial markets... The first facility to prop up large employers involves bridge financing for up to four years for investment-grade companies, in exchange for purchases of newly issued corporate debt by the Fed. Businesses could defer principal and interest payment to preserve cash for up to six months, but they would not be allowed to buy back shares or pay dividends if they tap the facility. A second programme would allow the Fed to purchase corporate debt in the secondary market. The Fed also on Monday revived TALF — a facility dating back to the 2008 financial crisis — which gives the Fed the ability to buy securities backed by student, car and credit-card loans, as well as loans to businesses through the Small Business Administration. The US central bank said TALF and the other new programmes combined would provide up to $300bn in financing for “employers, consumers, and businesses”, backed by the US Treasury department, which is offering $30bn in equity from its Exchange Stabilisation Fund to support the measures. Separately, the Fed also expanded existing programmes to ease strains in the markets for municipal debt and the short-term loans known as “commercial paper” and said it would soon announce a “Main Street Business Lending Programme” to lend directly to small businesses.
Edward Harrison (HT: Ananth) puts the Fed's announcement in perspective,
The Fed is essentially putting a floor on multiple asset classes in the money and credit markets. Equities and high yield bonds are not in the mix. The point is that the Fed is saying it will backstop as many investment grade credit markets as it can -- and in unlimited quantities... The Fed is simply trying to prevent a financial crisis... The Fed recognizes that liquidity has dried up everywhere. So it is provide blanket credit support. Think of the Fed as essentially the buyer of last resort for all investment grade credit assets. But, equities and high yield are residual asset classes. And, they are still exposed to the downturn in the real economy and earnings decline. In terms of credit markets, given how many asset classes the Fed is backstopping, think of this as both a backstop and credit easing. But, the reason the Fed is exempting junk bonds from its credit backstop blanket because that is a step too far in terms of credit easing. Equity and high yield bonds are still subject to the risk that residual asset classes have. And their fortunes will depend on the fiscal response.
The Fed has thrown the gauntlet for other central banks to follow.
13. Adair Turner calls for developed country central banks to print money,
But with government bond yields close to zero, most developed nations face no short-term financing constraint. For countries with national currencies, central bank monetary financing of temporarily increased fiscal deficits is a feasible option. This would provide strong stimulus without increasing the public debt burden.
He drives home the point about why this crisis is different,
As in the global financial crisis of 2008, we need to understand the balance between the three categories of problems that we face: liquidity, solvency and deficient demand. Liquidity problems in either the financial system or real economy can be offset by forceful central bank action, and several appropriate policy packages have already been announced... these actions can ensure that fundamentally sound businesses are not driven to bankruptcy by a lack of credit. But they will be insufficient to avoid major solvency problems in specific sectors. If bars, restaurants, hotels and airlines have no customers for two months, no amount of cheap credit can prevent eventual bankruptcy. If staff are kept on, corporate losses will accumulate rapidly. If workers are laid off in large numbers, they will cut their spending even on sectors such as online shopping or entertainment that could be buoyant in a stay-at-home economy. Without offsetting action, we will face a deflationary cycle of falling consumption and income. Monetary policy can do almost nothing to offset these dangers; with interest rates already rock bottom, further small cuts will foster neither business investment nor consumer spending. Only fiscal expansion can make a major difference. This mirrors our experience in 2009, when fiscal deficits of more than 10 per cent of gross domestic product in Japan, the US and the UK, and 6 per cent in the eurozone, were essential to avoid a sustained and deep depression.
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