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A feckless Fed, huge deficits and poisonous politics bring us to a crisis – MarketWatch

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On Sunday, the Federal Reserve bowed to the inevitable.

In the face of market turmoil brought on by the rapid spread of the novel coronavirus, the Fed essentially declared a national emergency by slashing the federal-funds rate a full percentage point to 0%-0.25% for the first time since the financial crisis and pledging to buy at least $700 billion of U.S. Treasurys and mortgage-backed securities three days before its next scheduled policy-setting meeting .

Investors gave a thumbs down by dumping stocks
DJIA,
+9.36%

SPX,
+9.28%

and buying Treasurys.

READ:Stock-market futures sink after emergency Fed rate cut — ‘if this doesn’t work, what will?’

Bottom line: Investors don’t think the Fed’s moves are enough. What’s missing is massive fiscal stimulus, which has yet to take place. And there are real obstacles to that — trillion-dollar deficits and intense partisanship that has prevented what used to be slam-dunk bipartisan reforms. Fiscal irresponsibility, toxic politics and a Fed that was too afraid to offend stock investors have combined with the coronavirus, a black swan if there ever was one, to create the current crisis whose resolution right now looks murky.

One crisis after another, plus the persistence of the “Greenspan put,” kept the Fed from raising the federal-funds rate anywhere close to the 5.25% it hit before the financial crisis. It took three years for the FOMC to raise fed funds from 0%-0.25% to a mere 2.25%-2.5%, but only a year to do a round trip back to zero.

Now, as Fed Chairman Jerome Powell pointed out at his press conference, the ball is in the federal government’s court. But its hands may be tied, too. The massive 2017 tax cuts, which primarily helped wealthy taxpayers and big corporations, provided a small, temporary boost to economic growth, but they and the subsequent feeding frenzy of spending increases approved by the Republican Congress have left us with a $1-trillion federal deficit even before the economic effects of the coronavirus epidemic ripple through the economy.

Most economists agree recoveries are times to fill the federal coffers and crises or recessions are the time to spend the money. But there’s little room for the huge fiscal stimulus some economists say is needed to fight this crisis.

READ:Goldman says U.S. growth will fall 5% in the second quarter. A coronavirus recession is probably coming.

Which brings us to politics. For decades, polarization has been increasing sharply in Washington, D.C. And let’s not mince words here; it’s been driven by a rapid move to the extreme right by the Republican Party, from the Tea Party to the election and mass worship of the faux populist Donald J. Trump.

And yes, the Democratic Party has moved leftward, but not as much as Republicans have moved to the right. First in the 2018 elections and even more in the 2020 primaries, moderate mainstream Democrats have repudiated Sen. Bernie Sanders (I-Vt.) and the far left.

The GOP’s extreme rejectionist politics first appeared in the heat of the financial crisis when House Republicans voted down the Bush administration’s Troubled Asset Relief Program (TARP). They reversed themselves after the Dow Jones Industrial Average slumped. But the same hatred of the federal government persists.

The impeachment of President Trump pushed partisan divisions to the breaking point. Last week Treasury Secretary Steven Mnuchin negotiated the modest coronavirus relief package with Speaker of the House Nancy Pelosi (D-Calif.) because the president reportedly refuses to talk to her. (The Senate was out of town for the weekend and has yet to vote on the bill.)

President Trump has yet to propose a massive fiscal spending package — both Democrats and Republicans burst his payroll-tax-holiday trial balloon — and if things unravel more, we may get one, though the looming presidential election complicates things. As investors clamor for some kind of certainty — or at least leadership —the Fed is out of ammo, the federal government is fiscally tapped out, and the factionalism Washington and Madison warned about is tearing the country apart.

READ:America is so divided because federalism isn’t working

Yes, indeed, the chickens are coming home to roost, but this time they’re infected by a deadly virus.

Howard R. Gold is a MarketWatch columnist. Follow him on Twitter @howardrgold.

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The Coronavirus Is Transforming Politics and Economics – The New Yorker

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Just like in wartime, people are frightened, public attitudes are changing, and the circumstances necessitate an expanded role for the government, including the Department of the Treasury.Photographer by Andrew Harrer / Bloomberg / Getty

In early March, when health experts warned that the United States risked running short of vital medical supplies, such as masks and ventilators, Donald Trump resisted calls to invoke the Defense Production Act, a 1950 law that gives the President broad powers to prioritize the production of certain items when they become important for national security. As recently as last week, he said, “We don’t need it.” Finally, on Thursday, Trump dropped the pretense and invoked the act to order the suppliers of ventilator manufacturers to give them the components they need to speed up production.

Every day, in ways small and large, the spread of the coronavirus is reshaping American politics. As the death toll rises and the economic fallout spreads, measures once considered unthinkable are being adopted, and not just in the public-health sphere. The $2.2 trillion emergency spending bill that Congress passed last week is worth about ten per cent of G.D.P., and in the coming months we are likely to see another stimulus. This dramatic ramp-up in federal spending is comparable to what happened in 1942, the year after Pearl Harbor, when federal spending as a share of G.D.P. rose by more than ten percentage points.

Trump is no F.D.R., of course, and the virus, unlike the Axis Powers, is an invisible enemy. But the record shows that lethal pandemics and major wars can both have enormous political and economic consequences. In his 2017 opus “The Great Leveler,” Walter Scheidel, a Stanford historian, described them as two of the “four horsemen” that have flattened economic inequality throughout human history. (The other two levelling forces that Scheidel identified were revolutions and state failures.) By decimating the population of medieval Europe, the Black Death made labor scarce, which raised wages and undermined the feudal system. The Civil War abolished slavery and gave rise to the Homestead Act of 1862. The First World War changed the role of women in the economy and paved the way for their political emancipation. The Second World War elevated the role of labor unions and led to the explicit adoption of Keynesian full-employment policies, through the 1946 Employment Act. In Europe, it facilitated the creation of a postwar welfare state, including the National Health Service in Britain.

These violent ruptures lasted years. We can hope that this horrible public-health crisis will also be temporary. And yet, the “wartime” metaphor is in many ways apt. Daily life has been transformed; in just two weeks, almost ten million Americans have filed unemployment claims; and earlier this week a White House task force said the death toll could eventually reach two hundred and forty thousand. Just like in wartime, people are frightened, public attitudes are changing, and the circumstances are necessitating a big expansion of the government’s role.

As of today, tens of millions of small and medium-sized firms will be able to take out bank loans to cover all of their running costs, including wages and rent, for the next eight weeks. If they keep their workers on the books, or rehire the ones they have laid off in the past couple of weeks, the Treasury Department will automatically repay the loans in their entirety. (I wrote about the scheme earlier this week.) The involvement of banks disguises the fact that this is essentially a huge, federal grant program, in which Uncle Sam will be paying the wages of tens of millions of Americans who are nominally private-sector employees. For a conservative Republican Administration, this is a strikingly interventionist move. But it doesn’t cover large corporations, and there are doubts about how quickly and widely the loans will be taken up. (The initial reports aren’t encouraging.) If the jobless count keeps rising, pressure will grow for the Administration to go further and copy the emergency job-protection programs that many European countries have adopted, which encompass businesses of all sizes and involve the government paying them directly.

In other policy areas, too, the Overton window—the range of political options considered acceptable—is expanding. The rapid passage of such a big stimulus, with more to come probably, has punctured the idea, assiduously promoted by deficit hawks, that we “can’t afford” more government programs. Despite all the additional spending, the U.S. Treasury is still able to borrow on remarkably favorable terms: on Thursday, the yield on ten-year Treasury bonds was just 0.63 per cent. And as a backstop, there is the Federal Reserve, with its electronic printing press at the ready.

You don’t have to be a convert to Modern Monetary Theory to have noted the alacrity with which the Fed, over the past month, has purchased and placed on its balance sheet about $1.5 trillion worth of Treasury bonds, commercial paper and bonds issued by large corporations, mortgage-backed securities, auto loans, and credit-card loans. In the coming days, it may well start lending directly to big corporations. As the Fed constructs a comprehensive safety net for Wall Street and corporate America, how can anyone argue against an equally comprehensive approach to safeguarding the welfare of medical workers, delivery-truck drivers, grocery-store employees, and other ordinary Americans on the front line of the battle to contain COVID-19?

The public at large may not grasp some of the financial intricacies, but it surely sees the urgent need for universal health care. According to a poll published by Morning Consult earlier this week, net support for Medicare for All—those who support it minus those who oppose it—has risen by nine points. The virus isn’t just raising support for socialized medicine; it is also undermining the finances of the private-insurance model. Caring for COVID-19 patients can be very costly. If the insurers have to recoup these costs next year, they could raise their 2021 premiums by more than forty per cent, according to an analysis by Covered California, the Golden State’s official health-insurance marketplace. Though Elizabeth Warren is out of the Democratic primary and it would be a huge surprise for Bernie Sanders to secure the Party’s nomination, they could well end up winning the debate over health-care policy.

In another important development, the mass layoffs that have resulted from the virus have also laid bare the iniquities of the gig economy, in which Uber drivers and other online-platform workers, temp-agency workers, and a whole variety of freelancers didn’t have access to health insurance, sick leave, or unemployment insurance. During an appearance on CNBC on Thursday, the investor James Chanos said he was selling short the stocks of gig-economy companies because their business model, which is based on classifying workers as self-employed to avoid giving them costly benefits, is likely to be challenged. “I think both political parties are going to be looking at that pretty hard,” Chanos said.

Much depends on the duration of the pandemic, of course. If the associated shutdowns prove to be reasonably short-lived—two or three months—the economy and the markets could rebound fairly rapidly. Congress and the Fed could wind down their emergency programs, and public attitudes could flip back. But the longer the pandemic goes on, and the deadlier it becomes, the greater the pressure will be for more government activism of various forms.

It would be reassuring to think that this pressure will always lead to necessary actions and progressive policies, but that might be kidding ourselves. A new study of the impact of the 1918 flu pandemic on the U.S. and European countries shows that it led to a decline in social trust. The spread of the virus, the confinement measures taken to counter it, and “rumours about enemy spies spreading the infection beyond the lines as a kind of biological weapon created a climate of suspicion and mistrust,” the authors noted.

With some people already calling for residents of COVID-19 hotspots to be confined to their own areas, and Trump referring to “the China virus,” we are already seeing some echoes of this phenomenon. As the pandemic intensifies, it could lead to rising xenophobia, a further accentuation of regional divides, and even demands for authoritarian remedies, which Trump, having settled into the idea of himself as a wartime leader, might be all too eager to exploit.

That is worst-case speculation. But COVID-19 is shifting the tectonic plates that undergird American politics, and, as with the progress of the virus itself, the range of possible outcomes is wide. It is in such circumstances that history is made, for good or ill.


A Guide to the Coronavirus

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Coronavirus: Playing party politics in a pandemic? – BBC News

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“United front.” “Unity of purpose.” “Common ground.”

Take your pick from the bank of phrases used by our politicians when they talk about the need to work together to tackle this deadly pandemic.

Two weeks ago when the executive’s 10 ministers held a joint press conference in Stormont’s grounds, it seemed like they might just be capable of doing it.

But that didn’t last long.

Sinn Féin has been pulling in the opposite direction from its power-sharing partner, the DUP, on many aspects of the response to this crisis.

The first and deputy first ministers, Arlene Foster and Michelle O’Neill, may have been standing side-by-side at regular press conferences, but their messages – on everything from school closures and testing to what counts as an essential business – have been entirely contradictory and confusing.

Flawed strategy?

Ms O’Neill’s latest comments, accusing Health Minister Robin Swann of being too slow to act, are significant because she is swiping at her very own government.

In the space of one interview, the concept of collective responsibility practically vanished.

Critics say she’s acting more like an opposition leader playing politics, than the joint head of an administration speaking up on principle.

But Sinn Féin says there is no point presenting a united front on a flawed strategy, and that if the party tried to resolve differences behind the scenes – rather than airing legitimate concerns with strategy in public – it would get slated for that.

Ms O’Neill says she’ll continue to “call out” problems within government, and that argument will hold weight with some, but it will further upset relations with the other four parties, in an already tense executive.

Arlene Foster tried to put out the flames, sounding a calm note when she appeared on Friday’s airwaves, although some within the DUP may have wanted her to take a tougher line.

Fragile relationships

For days now, Stormont sources have been briefing journalists that all is not well on the hill, as ministers and their respective teams go on the defensive.

Around the executive table, the atmosphere’s been repeatedly described as “toxic”, with decisions being taken in silos and even some policy announcements being put on social media before governmental colleagues have been informed.

It’s true the parties are facing challenges they never envisaged, made harder by the fact devolution was only restored in January after a three-year hiatus – relationships were already fragile.

The crisis has also highlighted the shortcomings in the limited powers afforded to the Stormont executive.

Whether it’s relying on Westminster for extra funding, or looking to Dublin for help in securing additional equipment, given the bidding war going on across the world, Northern Ireland only has so many levers to pull and no doubt that is also exacerbating internal strains.

Failure is not an option as lives are depending on the executive and time is short. The peak of the virus is due to arrive in Northern Ireland during the next two weeks.

Over the years the clarion call here has been for politics to be taken out of health. But if the parties couldn’t do that in the past how can anyone expect them to take the politics out of a pandemic?

The DUP-Sinn Féin partnership has always been one of reluctant necessity, due to Northern Ireland’s system of mandatory power sharing.

It’s hard to present a united front if someone doesn’t fully believe in it. Will the executive soon reach a point where the differences in approach to tackling this virus become too much to bear?

For the sake of everyone in Northern Ireland, let’s hope not.

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Trump letter attacking Schumer is sent as President says 'this is not the time for politics' – CNN

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Trump was speaking at the White House daily coronavirus briefing at the same time his staff released the letter to Schumer, in which he blasted the New York Democrat’s request for more streamlined leadership in mandating production to support the coronavirus response.
“I’ve known you for many years but I never knew how bad a Senator you are for the state of New York, until I became President,” Trump wrote to Schumer, disparaging his request as “Democrat public relations letter and incorrect soundbites, which are wrong in every way.”
The exchange highlights Trump’s negotiating strategy once again defaulting to a political clash with a top Democrat as the coronavirus outbreak worsens, forcing the administration to work with key Democrats such as Schumer, a long-standing critic, to establish a federal response.
However, Trump had attempted to keep the letter from being sent out after speaking with Schumer on the phone Thursday afternoon.
Schumer’s office told CNN that the President had told the New York Democrat that he had written a “very nasty letter” to Schumer, and “he would try to stop it from going out and would apologize to Sen. Schumer if he didn’t stop it in time.”
New graf: New York has emerged as the virus’ epicenter in the United States, leading all other states with more than 92,000 cases and more than 2,400 deaths as of Thursday night, according to the Johns Hopkins University Center for Systems Science and Engineering. New York Gov. Andrew Cuomo has also drawn Trump’s ire after pushing back against the federal government’s response strategy.
In the letter, Trump attacked Schumer for New York’s response to the coronavirus pandemic, as well as what he calls the “ridiculous impeachment hoax.” Trump claimed that if Schumer had spent less time on impeachment, New York might not have been “so completely unprepared for the invisible enemy.”
Schumer’s qualms came after Trump invoked the Defense Production Act — which gives the government more control during emergencies to direct industrial production — last week to compel General Motors to produce more ventilators for increasing coronavirus hospitalizations, and named White House trade adviser Peter Navarro as the act’s policy coordinator for the federal government.
Speaking to CNN’s Anderson Cooper on Wednesday night, Schumer described his plans to call on Trump to name a new point person for management of the Defense Production Act and disparaged Navarro.
Navarro “is not up to the job,” Schumer said. “He’s a very nice man, but he has had no experience doing things like this, and they have no one, that I can best tell, in charge of the distribution.”
He called on the administration to select “one person, a military person, a general who knows how to deal with logistics and order mastering, who knows command and control.”
That person should be “in charge of both production and distribution of all the kinds of needed equipment and get it to the places that need it and have shortages,” Schumer said, recommending that Gen. Mark Milley, chairman of the Joint Chiefs of Staff, select a candidate for the role.
CORRECTION: This story has been updated to correct the number of deaths from coronavirus in New York state as of Thursday night.

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