The Federal Reserve has been thrust into the lead role of saving the U.S. economy from the coronavirus pandemic, taking on the extraordinary task of rescuing households, businesses and local governments as Washington lawmakers have spent weeks debating how to come to grips with the crisis.
In just over a week, the Fed has slashed its main borrowing rate to zero, pledged unlimited purchases of U.S. government bonds, announced plans to back state and local governments, and even promised to buy debt from large corporations. It has said it will set up a program to lend to small businesses and eased pressure on rates for student loans, auto loans and credit card debt.
All told, the support for the economy will easily total trillions of dollars, with more plans in the works.
The calls for the Fed to lend to all corners of the economy are striking given Congress’s move just 10 years ago to restrict its emergency lending authority after the last economic meltdown because its power was deemed too far-reaching.
But officials inside the Fed — and even critics of the central bank — say that given the magnitude of the crisis, it had little choice to but to launch a stunning array of initiatives to help soften the blow of a recession or even to stave off a years-long depression.
“I am a Fed skeptic. I want to limit their power,” said Sheila Bair, who helped lead the country through the last financial crisis as head of the Federal Deposit Insurance Corp. But the “sheer magnitude of the problem,” she said, “justifies them really stretching the limits of their authority.”
Thus, the Fed under Chair Jerome Powell, which has endured more than a year of abuse from President Donald Trump for not doing more to boost the economy, is now embarked on the quickest and most massive response to a crisis in its more than 100-year history.
Unlike in the 2008 crisis, when the Fed sparked an outcry for bailing out nonbanks like insurance giant AIG and investment bank Bear Stearns, it now has formal buy-in from the Treasury Department for many of its emergency programs. Thanks to the landmark 2010 Dodd-Frank Act, Treasury Secretary Steven Mnuchin has to authorize the central bank to lend to such non-bank companies in emergencies, and his department has kicked in taxpayer money to cover losses if borrowers default.
The stimulus package that Congress is on the brink of approving will vastly expand the amount of cash available to cushion those losses. But, unlike the controversial 2008 Troubled Asset Relief Program, the scope of lending will be larger than just appropriated funds.
Because Treasury has been supplying 10 percent of the funding for Fed emergency lending programs, $425 billion from Treasury could translate to more than $4 trillion in lending to businesses, consumers, local governments, and money market mutual funds.
“They opened up the channels, and when the Treasury gets more money, they’ll be able to scale up these programs,” former Fed Vice Chairman Donald Kohn said.
But the Fed will still be under a microscope as it implements these programs, especially in lending to large corporations. The central bank, seeking to head off criticism from lawmakers, has already said companies will face restrictions on buying back their own stock — which boosts share prices and disproportionately benefits wealthier stockholders — and on CEO bonuses.
The Fed will also be bringing in private-sector financial firms to help administer the programs, a potential line of attack it could face down the road; the central bank has already hired asset manager BlackRock for that purpose.
Still, the amount of help that is directly targeted at consumers and small businesses will soften the criticism of moves to help larger firms, said Amanda Fischer, a former Democratic congressional aide who now directs policy at the Washington Center for Equitable Growth.
She said the Fed is usually inclined to support markets rather than people directly. “Now we see cracks” in that approach as the central bank broadens its focus to also embrace Main Street, she added.
That’s partly because of the sheer scale of this crisis and pressure it is getting from even Republicans, including Trump, to do more, Fischer said.
Many free-market Republicans, who have balked at the central bank for its large footprint in the past, are sounding a different note now. Prominent GOP lawmakers like Sen. Pat Toomey (R-Pa.) and Rep. Patrick McHenry (R-N.C.) have pushed for the Fed to do more to support businesses during this crisis.
The central bank’s bond holdings are ballooning in the midst of the pandemic, a topic that has also sparked complaints from Republicans in the past. Its massive purchases of Treasury securities and mortgage-backed securities will over the course of a week equal its second round of asset purchases in the wake of the 2008 crisis, which took place over seven months.
That’s part of an effort to keep the key markets for U.S. government debt and mortgages, as well as all the markets that those assets feed into, from freezing up.
All these unprecedented moves could transform how the public views the Fed’s role in downturns, although support for similar actions in the future “will depend a lot on where the crisis begins and who’s paying the price,” said Kohn, the former Fed official.
Bair said conversations about the Fed’s role should be put on hold in recognition of just how broad the economic damage could be. She added that because the Fed prints money and controls the rails of the payments system, using it as a medium for bolstering the economy is the quickest option.
“They’re a very efficient transmission mechanism,” she said of the central bank. “If you think of them as more of administrators as opposed to a piggy bank, that might be a better way of looking at it.”
Still, there are limits to what the Fed can do; one of the ways the central bank has historically sought to protect its authority is by keeping its goals relatively narrow and noncontroversial. For example, it has declined to outright purchase debt from cities and governments.
Glenn Hubbard, dean emeritus at Columbia Business School and former chief economist to President George W. Bush, said Congress needs to act to do its part, including sending money directly to people, which the Fed doesn’t have the authority to do.
As for the Fed’s actions: “Any time you get into something that has any risk, you’re going to have political concerns about the Fed, but the Fed is a lender of last resort,” he said. “It’s the right thing to do.”
Coronavirus economy: Recession or depression? – Aljazeera.com
More economists are warning of a recession in the United States, Europe and globally as coronavirus containment measures bring entire sectors of the world’s economy to a halt. Many have also compared the swiftness and severity of the coronavirus slowdown with the Great Depression that began in 1929.
Are we looking at a recession? Or a depression? And what exactly is the difference?
What is a recession?
A recession has traditionally been defined as two consecutive quarters or six straight months of negative economic growth. In the US, though, the National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
What does the NBER mean by ‘real’? And while we’re at it – what is GDP?
Real means “adjusted for inflation”. GDP stands for gross domestic product – a measure of the value all the goods and services produced by an economy within a certain timeframe.
Got it. So why do we care what the NBER says?
Because the NBER dates the business cycle – the peaks and troughs of economic activity – it actually has the measurements to determine when a recession is, well, a recession.
The NBER is not a government entity, by the way. It’s a private, non-profit, non-partisan research organisation. It also publishes really interesting working papers, like this one examining what the Spanish flu pandemic of the early 1900s can tell us about the economic fallout from coronavirus.
Understood. So how long can recessions last?
It depends. By NBER’s definition, a recession does not necessarily have to last a minimum of 6 months. And some downturns continue for well over a year. The Great Recession in the US started in December 2007 and lasted until June 2009. That’s 18 months in total. Nigeria fell into its first recession in a generation at the start of 2016 and did not emerge from it until the second quarter of 2017.
What made the Great Recession ‘great’?
The “Great” Recession earned that moniker because it was the worst crisis the US economy had experienced since the Great Depression of 1929. The name also turned out to be appropriate because it was the longest-lasting of the 17 recessions that the US has experienced to date.
What is a depression, then?
There is no set definition for a “depression”, but when a country is faced with a prolonged economic downturn that is measured in years, rather than quarters – then you can be pretty certain it is experiencing a depression. The Great Depression, for example, began in 1929 and lasted until 1939.
Could the coronavirus pandemic trigger a recession?
Most economists have come around to that view. Last week, the International Monetary Fund said it sees negative global growth this year, and warned that we’re facing “a recession at least as bad as during the global financial crisis or worse”.
Many Wall Street economists also see a recession in the cards. Goldman Sachs thinks US economic output could nosedive 24 percent from April through June compared with a year earlier, and that the unemployment rate could peak at nine percent in the months ahead. Capital Economics sees second-quarter US economic growth plunging 40 percent from a year earlier and unemployment spiking to 12 percent.
OK, this is sounding scary. Could we be heading for a (gulp) depression?
No one can say for sure what the future holds. Some economists think that economic activity could actually pick up in the second half of this year, depending on government stimulus packages, when the coronavirus crisis peaks and other factors.
So why do we keep hearing the words ‘coronavirus’ and ‘depression’ together?
When you do hear or read the word “depression” alongside “coronavirus”, it is usually analysts drawing comparisons with the suddenness and severity of the economic slowdown that happened in 1929.
But what do veterans from the 2008 financial crisis think?
Economist Nouriel Roubini, who warned about the 2008 financial crisis as early as 2006, thinks a rebound later this year is unlikely. In a column for Project Syndicate, Roubini – aka “Dr Doom” – argued that public health responses in advanced economies have fallen short of what is needed to contain the pandemic, and that fiscal packages are “neither large nor rapid enough to create the conditions for a timely recovery”. For these reasons, he says, “the risk of a new Great Depression, worse than the original – a Greater Depression – is rising by the day”.
On the other hand, former Federal Reserve Chairman Ben Bernanke, who stewarded the US economy through the 2008 financial crisis, told business news network CNBC that the current shock the US economy is experiencing from coronavirus is “much closer to a major snowstorm or a natural disaster than it is to a classic 1930s-style depression”.
Older workers will jump-start an economy post-pandemic faster than younger ones, argues Citigroup – MarketWatch
What do older workers have over younger ones as an economy tries to recover from a pandemic? They can potentially breathe life into a shut-down economy faster, in part because they have more money to spend and better health insurance in case they do get sick.
So said Dana Peterson and Catherine Mann, global economists at Citigroup, who poured cold water on one idea circulating among policy makers that would see younger workers allowed back on the job ahead of their older counterparts.
“First, allowing younger people to return to work may help restart the engines of the economy, but they are actually not the ones who drive much of the consumer spending that fuels GDP growth,” said the pair in a note to clients.
They cited evidence that shows peak spending is something that often happens later in life for advanced and emerging economies. “This is because older generations often have reached peak earnings, and own assets (homes and financial assets) that facilitate greater spending.”
Older generations also play harder, meaning they spend more on experiences, such as in the U.K., where those 50 and older spend more than twice as much than persons 18 to 49, while in the U.S., that peak spending on movies, shopping, travel, etc. occurs between ages 45 to 54. And spending stays elevated over the mid-50s to mid-70s range, they said.
The third reason harks back to a scene in the 1991 movie “Fried Green Tomatoes,” in which actress Kathy Bates rams the car of a couple of younger women who swiped her parking spot. “Face it girls, I’m older and I have more insurance.”
Older workers simply have better access to health care in case they do get sick, as opposed to younger co-workers. “In the U.S., which has one of the highest Universal Health Coverage service coverage indexes in the world at 84, younger persons spend the least on health care and insurance, and are also less likely to have health insurance,” the economists noted.
The health-care coverage situation is worse in South Asia and sub-Saharan Africa, and even in countries that have better coverage, younger people can still carry the virus and infect multigenerational households. That has been the case in Italy, where the disease has had a bigger effect with more deaths on the older population.
Finally, the economists argued that the modern workplace needs all ages to function.
“Indeed, older workers may have the experience required to help guide the activities of the younger generations,” said the economists. “Practically, many persons who are in management and positions of leadership skew older. Hence, it seems inconceivable that younger people can return to work in every facet without managers in place.”
It could take three years for the US economy to recover from COVID-19 – World Economic Forum
The US and Eurozone’s economies could take until 2023 to recover from the impact of the COVID-19 coronavirus crisis, according to a new report from consultancy McKinsey & Company.
If the public health response, including social distancing and lockdown measures, is initially successful but fails to prevent a resurgence in the virus, the world will experience a “muted” economic recovery, says McKinsey. In this scenario, while the global economy would recover to pre-crisis levels by the third quarter of 2022, the US economy would need until the first quarter of 2023 and Europe until the third quarter of the same year.
If the public health response is stronger and more successful – controlling the spread of the virus in each country within two-to-three months – the outlook could be more positive, with economic recovery by the third quarter of 2020 for the US, the fourth quarter of 2020 for China and the first quarter of 2021 for the Eurozone.
In these scenarios involving partially effective interventions, policy responses could partially offset economic damage and help to avoid a banking crisis, says McKinsey. The firm has modelled nine scenarios, ranging from rapid and effective control of the virus with highly effective policy interventions to a broad failure of public health measures and ineffective policy and economic interventions.
The economic impact in the US, however, could exceed anything experienced since the end of World War II.
The industries hardest hit by COVID-19, including commercial aerospace, travel and insurance, may see a slower recovery. Within the travel sector, the shock to immediate demand is estimated to be five-to-six times greater than following the terror attacks of 11 September 2001 – though recovery may be quicker for domestic travel. The crisis has also amplified existing challenges or vulnerabilities in the aerospace and automotive industries, which will affect their recovery rates.
As supply chains around the world are disrupted, the report warns that the full impact is yet to be felt. Business leaders must prepare for the effects on production, transport and logistics, and customer demand. These include a slump in demand from consumers leading to inventory “whiplash,” as well as parts and labour shortages due to manufacturing plants shutting or reducing capacity.
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