The Fed can’t kill the virus

By now, it must be obvious to almost everyone that we can’t — and won’t — escape another recession. The coronavirus pandemic is pushing just about every major segment of the US economy into serious decline. Frightened consumers are cutting their purchases. Businesses have already curbed investment spending and, facing new uncertainties, are likely to retrench further. Global trade has weakened and will continue to do so. Against this backdrop, it’s hard to imagine the United States (and probably the world as a whole) escaping without two quarters of negative growth in the gross domestic product, the conventional definition of a recession.
Unfortunately, this doesn’t tell you much. Recessions come in all varieties: mild, middling and murderous. For example, the 2001 recession lasted only eight months, according to the National Bureau of Economic Research.
In 2001, unemployment averaged 4.7%. On the other hand, the 2007-2009 Great Recession lasted 18 months and left a legacy of crushing unemployment. In 2010, the jobless rate averaged 9.6%.
Regarding the economy, you should keep three questions in mind.
First, is this business downturn a repeat of the 2007-2009 Great Recession?
The answer: “no” and “yes”. You’ll recall that the 2007-2009 collapse originated in the nation’s financial sector — the banks, insurance companies, hedge funds and the like that oversee the nation’s savings and investment.
All those dubious mortgages resulted in millions of Americans losing their homes, and many of the nation’s biggest investment houses (Lehman Brothers, Merrill Lynch, Bear Stearns) disappearing as independent firms.
Fundamentally, the Federal Reserve caused the 2007-2009 crisis by practicing easy-money policies that spawned so many bad loans. In the aftermath, the Fed helped atone for its bad behavior by shielding the financial system from a total collapse. When the private sector wasn’t willing to lend, the Fed provided its credit.
This time is different. The Fed didn’t cause the coronavirus. Nor can it kill the virus. Still, it has been thrust into the same “lender of last resort” role it played during the financial crisis and Great Recession. It has cut interest rates (to zero in the case of the so-called Fed funds rate), encouraged banks to borrow from the “discount window” (a Fed facility that lends to banks) and pledged to buy $500 billion worth of Treasury securities and $200 billion of mortgage-backed securities.
All these technical steps aimed to prevent a collapse of credit that could devastate production, employment and profits. The Fed is trying to prevent the economy from going into “cardiac arrest,” says David Wilcox, a former top Fed official now at the Peterson Institute for International Economics.
There has been some criticism of the Fed for not responding fast enough or powerfully enough to stabilise stocks and the economy. The Treasury Department’s decision to open a lending facility devoted to funneling money into the commercial paper market may have quieted this criticism.
Commercial paper is a major source of short-term credit for large firms; the borrowed money is used to meet payroll or pay suppliers.
Second, what will Congress and the White House do?
There seems to be widespread agreement among congressional Republicans and Democrats, as well as President Trump, that only massive intervention sanctioned by the nation’s political leaders would suffice to prevent an economic free fall. The thinking is that the Fed is reaching its legal limits in supporting the economy and that, even if this were not so, the leadership in the crisis should come from democratically elected officials and not appointed officials.
All manner of proposals have been bandied about. Treasury Secretary Steven Mnuchin has estimated the total cost of a proposed stimulus package to exceed $1 trillion. The proposals include temporary cuts in payroll taxes, programmes to compensate workers who have lost their jobs through no fault of their own, paid sick leave for workers who lost their coverage, and financial support for industries that have suffered large losses from the coronavirus (airlines, hotels, restaurants, as examples).
There seems to be a consensus to do something, but not on what. Third, how long will it take — and at what cost — to develop a new vaccine that will subdue the coronavirus?
We must never forget that we’re not dealing with an ordinary economic or
financial problem but rather with a noneconomic problem that has enormously destructive economic consequences.
If we can’t solve the underlying health problem, the prospects of overcoming the economic problem will be far more complicated and costly.
Even if we ultimately contain the virus, it may take some time, possibly years. If Americans think this problem will recede quickly, they are almost certainly deluding themselves.

—The Washington Post

Robert J. Samuelson is a journalist for The Washington Post, where he has written about business and
economic issues since 1977. He was a columnist for Newsweek magazine from 1984 to 2011