Calling the world’s governments unprepared for Covid-19 is to laughably understate the case. They apparently hadn’t even considered the possibility of a pandemic shutting down the global economy, and had zero contingency plans for dealing with either the physical or financial impact.
Now they’re making it up as they go along. Among the offers currently on the table:
Japan is providing loans to businesses hit by the sudden evaporation of travel, sports and trade.
The US raised its repo market funding and proposed small business loans and tax relief.
Europe held interest rates steady while boosting QE modestly.
Australia is giving low-income citizens stipends of $750.
The markets, not surprisingly, are appalled by the modesty of these plans and are melting down. Pretty much everything that can be sold is being sold.
Which means today will see a flurry of conference calls in which the ECB, BoJ, Fed and their elected officials try to hammer out a coordinated shock-and-awe policy to keep the patient from bleeding out.
In a hyper-financialized world, the only remaining tools are variants of easy money, so that’s what is coming. But since “easy” may not do it, expect the money to be free this time. Forget about the loans the US and Japan have mentioned and look instead to Europe (more financial asset purchases) and Australia (direct payments).
The Bank of Japan is already a big buyer of equities, for instance. But the Fed will soon be the biggest. Here are former Fed chair Janet Yellen’s thoughts on the subject:
In a speech in Hong Kong this week, former Fed chair Janet Yellen stated that “global central banks don’t have adequate crisis tools.”
According to that logic, she believes that launching additional multi-trillion dollar rounds of quantitative easing and cutting interest rates into negative territory – two aggressive and controversial monetary tools that are currently available – are simply not enough. Yellen’s comments this week echo comments that she made in September 2016 when she was still Fed chair:
The Federal Reserve might be able to help the U.S. economy in a future downturn if it could buy stocks and corporate bonds, Fed Chair Janet Yellen said on Thursday.
The Fed’s current toolkit might be insufficient in a downturn if it were to “reach the limits in terms of purchasing safe assets like longer-term government bonds.”
“It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions,” she said.
As for direct payments to citizens, businessman/presidential candidate Andrew Yang generated a surprising amount of buzz in the Democrat primary by proposing a $1,000 per month payment to every American adult. From his campaign page:
The Freedom Dividend, Defined
In the next 12 years, 1 out of 3 American workers are at risk of losing their jobs to new technologies—and unlike with previous waves of automation, this time new jobs will not appear quickly enough in large enough numbers to make up for it. To avoid an unprecedented crisis, we’re going to have to find a new solution, unlike anything we’ve done before. It all begins with the Freedom Dividend, a universal basic income for all American adults, no strings attached – a foundation on which a stable, prosperous, and just society can be built.
There’s no need to debate the (glaring and potentially catastrophic) downsides of governments buying up the private sector and/or depositing trillions of dollars in random bank accounts. Those risks are in the future and the crisis is at the door.
The more interesting question is: will these things work? A pandemic, after all, is a physical rather than financial crisis, and it’s unclear how an extra thousand dollars a month or a modestly bigger stock portfolio will convince people to fly or book cruises or stand in line at Costco when such activities carry a potential death penalty.
But we’re apparently going to find out.