On Wednesday, as markets continued to gyrate wildly amid what amounts to an across-the-board margin call, Janet Yellen and Ben Bernanke called on the Fed to do more to ameliorate the strain on households and businesses from what, ultimately, will be a near total shutdown of the US economy.
At the same time, Bill Ackman called on Trump to declare “an extended Spring Break”, that would entail shutting down the country for 30 days, and declaring all payrolls, rent, mortgages and interest expenses the purview of the federal government until such a time as the economy is back on its feet, and citizens are safe.
We are, to put it bluntly, at a tipping point.
Some now fear that failing to take unprecedented action immediately could result in a devastating depression from which the economy may not fully recover for decades.
More importantly, some seem to believe that absent a kind of universal shelter-in-place imperative applicable to virutally the entire western world, the health risk to the public could spiral out of control.
In short, we’re now long past “concern.” Over the past 48 hours, it feels as though we’ve even moved beyond “panic” into some new, unexplored realm where serious people are pondering an almost apocalyptic scenario.
It’s crucial to note that it’s very difficult at this juncture to decide who’s being rational and who isn’t. Indeed, the point seems to be that until we know, with something approximating certainty, whether the most dire projections are or aren’t plausible, it’s best to take no chances.
For those wondering, my own personal view is that fear has now run out ahead of reality. That’s not to downplay the human suffering, nor is it to suggest that the economic hit from the measures that have already been put in place isn’t going to be dramatic. But we seem to be treating COVID-19 like one of the hemorrhagic fevers – as though Ebola or Marburg is loose and spreading unchecked. But, I’m no virologist, and this isn’t an Epidemiology portal.
With the above as the backdrop, below find Ackman’s open letter to Trump, followed by (heavily abridged) excerpts from Bernanke and Yellen’s Op-Ed in FT.
By Bill Ackman
The only answer is to shut down the country for the next 30 days and close the borders.
Tell all Americans that you are putting us on an extended Spring Break at home with family. Keep only essential services open. The government pays wages until we reopen.
No one defaults, no one forecloses. A 30-day rent, interest and tax holiday for all. The shutdown is inevitable as it is already happening, but not in a controlled fashion which is extending the economic pain and amplifying the spread of the virus.
With exponential compounding, every day we postpone the shutdown costs thousands, and soon hundreds of thousands, and then millions of lives, and destroys the economy.
Please send everyone home now. With your leadership, we can end this now. The rest of the world will follow your lead. A global Spring Break will save us all.
By Ben Bernanke and Janet Yellen
The underlying challenges today are quite different [than the financial crisis]. Back then, the near-collapse of the financial system froze credit and spending; the goal of monetary policy was to restart both. Now, the problem is not originating from financial markets: they are only reflecting underlying concerns about the potential damage caused by the coronavirus pandemic, which of course monetary policy cannot influence.
In the near term, public health objectives necessitate people staying home from shopping and work, especially if they are sick or at risk. So production and spending must inevitably decline for a time.
So what are the Fed’s objectives today? Its recent actions have been aimed at stabilizing financial markets, which have been highly volatile and have not functioned normally.
However, the Fed and other policymakers face an even bigger challenge. They must ensure that the economic damage from the pandemic is not long-lasting. Ideally, when the effects of the virus pass, people will go back to work, to school, to the shops, and the economy will return to normal. In that scenario, the recession may be deep, but at least it will have been short.
But that isn’t the only possible scenario: if critical economic relationships are disrupted by months of low activity, the economy may take a very long time to recover. Otherwise healthy businesses might have to shut down due to several months of low revenues. Once they have declared bankruptcy, re-establishing credit and returning to normal operations may not be easy. If a financially strapped firm lays off — or declines to hire — workers, it will lose the experienced employees needed to resume normal business. Or a family temporarily without income might default on its mortgage, losing its home.
To avoid permanent damage from the virus-induced downturn, it is important to ensure that credit is available for otherwise sound borrowers who face a temporary period of low income or revenues. One of the Fed’s principal goals is to ensure that credit is available. It has strongly encouraged banks to work with borrowers suffering from temporary income losses, and it has lowered the interest rate it charges to banks who borrow from the Fed’s discount window. The Fed’s purchases of mortgage securities should lower mortgage rates and make it easier to obtain or refinance a mortgage. Congress is also looking at providing targeted help to households, firms and industries most severely hit by the economic effects of the virus.
However, there is more that the central bank should consider doing as it helps Congress reduce the long-run effects of the downturn. First, although the Fed has made the terms of its discount window more attractive, banks have historically been reluctant to use the discount window as a source of funding. They often fear that the markets will infer that if a lender has to use the discount window it must be financially weak. During the financial crisis, the Fed solved that problem by supplementing the discount window with a program called the Term Auction Facility, which auctioned funds to banks. For various reasons, banks were much more willing to use the TAF, and it was accordingly more successful at providing them with the funds they needed to make loans.
The Fed could also explore a low-cost financing facility for banks to support lending to households and small businesses adversely affected by the crisis. A facility, similar to the Bank of England’s Funding for Lending Scheme, could spur the provision of credit to these borrowers. Funding for lending programs have been successful in a number of other major economies at increasing the availability of credit to bank-dependent borrowers.
The Fed, with the support of Treasury and the Congress, could also restart the Term Asset-Backed Lending Facility — a program that succeeded during the 2008 crisis in expanding credit to many households and businesses. This facility could support the issuance of asset-backed securities collateralized by loans to businesses and consumers affected by the crisis.
Beyond ensuring that lenders have adequate liquidity, the Fed has already taken an important step toward unfreezing corporate credit markets. In 2008, the commercial paper market — through which corporations get essential short-term funding — effectively froze up, putting many companies under critical pressure. The Fed created a program called the Commercial Paper Funding Facility, through which the Fed made short-term loans directly to qualifying firms. The Fed is reinstituting this program, which was highly successful during the crisis, not only in ensuring the flow of short-term credit but in unfreezing the market and bringing back private lenders. It also made no losses and earned a profit for taxpayers.
Finally, as Eric Rosengren, president of the Federal Reserve Bank of Boston recently suggested, the Fed could ask Congress for the authority to buy limited amounts of investment-grade corporate debt. Most central banks already have this power.
Central bank tools cannot eliminate the direct costs of the virus, including the suffering and loss it will create. However, the Fed can help mitigate the economic effects of the outbreak, particularly by assuring that, once the virus’s direct effects are controlled, the economy can rebound quickly.