The Financial Side of the Crisis
Medical professionals are learning more about the virus every day. The New York Times has an interactive story that shows how the virus spread from Wuhan to every corner of the world. New York has become the new center of the outbreak. Over half of U.S. cases are in New York, 16,000 of more than 32,000. The global total just passed 350,000 and 15,000 deaths. We’re entering the second week of quarantines in the U.S. where governors around the country are giving orders to “shelter in place.” But although we are separated into small groups across the nation, a sense of unity is emerging.
In times of trouble, Americans have always risen to the challenge. Through individual effort, private enterprise, and the promise of a better future, the American people have always innovated in tough times. One of the President’s best qualities is his commitment to solving national problems through private enterprise, and American business owners are responding. Companies all over the country are pitching in to help, and they’re displaying the best of the private sector in troubled times. Amazon and Walmart both announced that they will be hiring over 100,000 workers in the coming months, a balm for reports that over 70,000 workers have already filed unemployment in the last two weeks. Ford, GM, and Tesla are going to start producing ventilators. 3M is rushing hundreds of thousands of N95 masks across the country, even as hundreds of people have begun making masks at home to give to healthcare workers. Lowe’s committed $25 million of products and donations to help fight the coronavirus and companies around the world are making similar donations. Doctors, nurses, and healthcare workers are working around the clock to take care of those who are sick and keep us safe. If you know someone who’s in the healthcare industry - text them and thank them for what they’re doing!
If there’s one message that transcends the fear and anxiety surrounding COVID-19 it’s that everyone has to do their part with what they have to stop this virus. As Christians, we have a once in a generation opportunity to ask what we can do to love God and to love our neighbors in this time of fearfulness and uncertainty.
The Trump administration may be preparing to change strategies as the economy continues to plummet. The economy is unquestionably the signature issue of the Trump presidency and the core of the President’s domestic and foreign policy. Yesterday Trump tweeted, “We cannot let the cure be worse than the problem itself,” a sentiment sure to resonate the longer the quarantines last. Jonathan Swan points out that this may lead to a showdown between economic experts and health experts as to what measures need to be taken after two weeks of social distancing. For right now, the government has generally followed the advice of Dr. Fauci and other health experts. We hope, for now, that the paths to safety and economic stability continue in parallel.
The Imperial College in London published a study that forced the UK to do a 180 on their Coronavirus strategy. While Boris Johnson had decided on the intrepid strategy of allowing the virus to run its course and to rely on herd immunity, this study indicated that it would lead to 500,000 deaths. The British government quickly changed course and adopted methods of suppression and mitigation. The same model predicted 2.1 million deaths in the U.S. without strict preventative measures like social isolation and quarantines.
Testing will remain one of the most important tools in controlling the spread of the virus. South Korea is the model for effective testing and containment. Having developed a strong network for testing in response to the 2015 MERS outbreak, South Korea has already administered 300,000 tests. As a percentage of population, that’s 60 times the number of tests the U.S. has administered. Having developed this system over the course of 2 years, they can test 20,000 people a day at labs all over the country using drive-up testing stations. Their strategy appears to be working; the number of reported cases is starting to go down.
The U.S. has been behind on testing, but it’s also difficult to compare the U.S. to other countries. South Korea, for example, has just 15% of the population and 1% of the land mass. Comparing South Korea to the area surrounding New York City, Philadelphia, and Washington D.C. is a closer comparison, but even then the U.S. is falling behind. U.S. capacity is growing and some project 75,000 tests will be administered each day in the coming weeks. The more people are tested, the better the options available will be for cornering and quarantining those who are spreading the virus. The numbers can be counterintuitive, though; expect the number of confirmed cases to go up at a more rapid pace and the death rate to go down. There are a lot of people who have the virus who have not been tested and so far the sickest people, with a higher chance of dying, have received a larger portion of the tests.
The Financial Impact
While nearly a billion people worldwide are practicing social distancing, focus has shifted away from the medical side of the virus toward the economic and financial sides of the virus. The Trump administration has been urging Congress to pass emergency measures to support businesses and individuals, but the process has been bogged down in partisan disputes. The President has already asked for a pause in foreclosures, student debt payments, and a three month tax extension. He also asked the FDA to relax certain regulations in an effort to speed up testing and treatment options, including the prospect of testing chloroquine and other drugs to treat the illness.
There are several competing ideas for what would be the best course of action for the economy. Writing checks to individuals and families has become the preferred remedy. Andrew Ross Sorkin has suggested “bridge loans” for small businesses. The government would issue no interest loans to business owners for the next few months and require them not to lay off their workers. This is an important measure against unemployment projections for the second quarter. The price tag would be close to $10 trillion, almost half of the U.S. GDP. This would give great confidence and stability to small businesses but would it actually solve the underlying problem? It does not address the financial crisis or the spending problem, both of which threaten to linger for a decade into the future, but it might be one of the smarter ways to deploy government bailout money and a middle road for the two political parties.
An emergency aid bill failed in the Senate Sunday night, 47-47. The measure would need 60 votes to pass. Democrats denied the bill after Nancy Pelosi promised a bill of their own in the House this week. Unfortunately, numbers are also dwindling. Sen. Rand Paul was the first senator to test positive for COVID-19 and shortly after, Sens. Mitt Romney and Mike Lee decided to quarantine on a doctor’s orders after sitting next to Paul this week in the Senate.
The two parties have reached a total gridlock on how to react to the impending financial crisis. Both parties are proposing cash stimulus in the form of checks written to individuals and households. They disagree on how to appropriate money to limit the damage. Dems think the GOP is too focused on corporations and not individuals. GOP congressmen have argued that individual checks will do little to solve the long-term economic damage. The extent of the treasury’s control over the $500 billion loan program was also a point of contention. Steve Mnuchin, Secretary of the Treasury, has been mediating the negotiations and representing the White House. Sunday night, Mnuchin and Schumer talked through the night trying to come up with a way to get legislation passed today in the Senate. In the “Playbook,” Jake Sherman and Anna Palmer called the standoff a “$1.6 Trillion Game of Chicken.”
The Economic Impact
The Treasury and the Fed are working together to find macro-economic solutions to stabilize the global markets. Kevin Warsh has called for the Fed to use its emergency powers to lead local and national banks through the crisis.
World banks are making huge sums of money available to stabilize the world economy. The European Central Bank announced it would buy €750bn of bonds on top of €120bn already purchased this year as part of the “Pandemic Emergency Purchase Programme.” This is similar to measures the Fed has taken in the U.S., promising $700bn in treasury debt and securities. Christine Lagarde, the head of the ECB, also promised historically low interest rates and €3tn in liquidity for refinancing to aid banks and businesses in the aftermath of the crisis. Ben Bernanke and Janet Yellin underscore the importance of stability and liquidity in world markets to help businesses through what may be a very long response time to this crisis, but they detail several other important steps to unfreeze corporate credit markets. Reviving lending programs from the 2008 crisis, like the Commercial Paper Funding Facility, might resuscitate private lending and small business spending.
As central banks continue to take measures to support the global markets, it’s important to remember the limits of macro-economic policy. Bernanke and Yellin end their article with a helpful reminder, “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.” It’s going to take more than money to recover from this crisis. It will take the government, the central banks, business owners, and individuals working together to solve this crisis, and it’s going to take time.
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Cole Feix is the founder and president of So We Speak. Follow him on Twitter, @cfeix7.