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Economy

How Bailout Backlash and Moral Hazard Outrage Could Endanger the Economy – The New York Times

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Credit…Patrick Semansky/Associated Press

The United States economy is in free fall, with tens of millions of people unemployed and countless businesses at risk of collapse. Congress has already allocated nearly $3 trillion to contain the crisis, and it is widely understood that it will need to do more.

Yet with stunning speed, the political conversation has pivoted from whatever-it-takes determination toward a different feeling: outrage.

Increasingly, lawmakers, media coverage and ordinary voters are focused not on preventing a potential depression, but on litigating which recipients of federal rescue are morally worthy and which are not.

For many on the political left, that has expressed itself as outrage at big corporations taking advantage of government rescues or cheap credit supplied by the Federal Reserve. On the right, it has included anger at federal government support for state and local governments, and at expanded unemployment insurance benefits supporting the jobless. For the news media, it has meant articles about rescue money going to arguably unworthy organizations like prep schools and steakhouse chains.

In effect, a scramble is underway to define who counts as deserving of a piece of the multi-trillion dollar federal rescues. The risk is that this fuels a sense of scarcity, of zero-sum jockeying. It has the potential to limit the government’s response and suspend help to affected individuals, businesses and governments before the crisis is anywhere close to ending.

“My conservative friends don’t think states and cities deserve help,” said Tony Fratto, who worked in the George W. Bush White House and is now a partner at Hamilton Place Strategies. “My progressive friends think certain businesses don’t deserve help. And my libertarian friends don’t want anyone to get help.”

“These are the seeds of long, slow, painful recoveries,” he said.

In particular, there is an emerging tendency to apply a lens that made more sense in the 2008 global financial crisis and its aftermath: the idea of “moral hazard.” Economists use the term to refer to the bad incentives that are created when people or companies know they will be rescued from their mistakes.

In the last crisis, conservatives complained about mortgage relief for home buyers who had borrowed more than they could afford — a televised rant about one such program helped spawn the Tea Party movement.

The bank bailouts of that era involved huge moral hazard problems, in that the very financial institutions that had fueled a mortgage bubble were being protected from its full consequences.

But arguments that similar concerns should apply in the Covid-19 crisis are less persuasive.

“They bailed out financial firms that had directly caused the housing bubble and financial crisis,” said Mike Konczal, a fellow at the liberal Roosevelt Institute. “That’s moral hazard and that’s real, and it made people angry for good reason. This is not that situation.”

But that crucial difference — that corporations are victims of the coronavirus, not the cause of it — is ignored by an emerging thread of commentary, both from libertarian-minded people in the financial sector and from liberals who are unhappy that companies that have spent years returning profits to shareholders through buybacks now seek government help.

In the first group, for example, is Howard Marks of Oaktree Capital, who wrote recently that “when people get the feeling that the government will protect them from unpleasant financial consequences of their actions, it’s called ‘moral hazard.’”

“People and institutions are protected from pain, but bad lessons are learned,” he said.

Plenty of companies came into this crisis with high debt levels that left them particularly vulnerable to a shock, but it’s also the case that no business can really be prepared for the kind of shock that the world economy is now experiencing.

Moreover, in the absence of the aggressive actions by the Federal Reserve to pump money into corporate bond markets, many businesses would presumably end up in bankruptcy not because they were flawed but because of a freeze-up in the availability of borrowing.

In normal times, bankruptcy is an efficient process to wipe out shareholders and turn a company over to its creditors. But an enormous wave of bankruptcies — which would take place if the government allowed the full effects of the pandemic to be felt — would have long-term consequences for working Americans and the overall economy.

Even in the best of times, bankruptcy restructuring often allows layoffs to be made without severance costs, as creditors renegotiate union contracts and other employment agreements. Now let’s imagine that thousands of large companies across dozens of industries entered Chapter 11 bankruptcy at once. This would overwhelm the bankruptcy courts and cause a shortage of “debtor-in-possession” financing that would allow companies to keep operating while restructuring. Many perfectly good companies would end up liquidating rather than surviving it.

A wave of bankruptcies might be good for enabling distressed debt investors to buy up valuable assets for pennies on the dollar. But it would be catastrophic for American workers, leaving behind industries even more concentrated among a few giants. It would most likely take years for the tissue of economic relationships to heal.

“It’s one thing when bankruptcy happens in a normal healthy economy where the cycle of creative destruction is happening,” said John Lettieri, chief executive of the Economic Innovation Group. “But right now we have destruction and massive closures.”

Similar logic is playing out across other areas of the federal rescue.

Mitch McConnell, the Senate majority leader, raised the possibility in an April interview that states that found themselves short of cash should be able to allowed to go bankrupt. Though he later backed away from that position, he and other Republicans have made clear they don’t want Democratic-leaning states with large public employee pension obligations to be bailed out with federal money.

States are uniformly facing collapsing revenue because of the pandemic, raising the prospect that even those with sound pre-crisis finances will have to make deep cuts in the coming years. This could hold the economy back even once the private sector rebounds.

The Paycheck Protection Program, the government’s signature effort to pump money to smaller businesses that agree to keep their employees on staff, has proceeded amid recriminations over whether businesses are truly worthy if they have access to funding elsewhere.

Part of the problem was Congress’s decision to initially fund the program with $350 billion, far below the needs of smaller businesses looking to cover their payrolls, and to expand it in a second round. The limited availability of money created an atmosphere of scarcity in which any business that gets aid — including large restaurant chains like Shake Shack and Ruth’s Chris Steak House, and firms with venture-capital funding — does so at the cost of another firm that might seem more worthy.

“The fact that there is more outrage over one bad business getting a P.P.P. loan than 100,000 companies deserving one but not getting one because of the anemic funding is ludicrous,” Mr. Lettieri said. “People have been chasing the shiny object of ‘who is most deserving, who isn’t, and where do you fall on the spectrum of need,’ which is a completely misguided way to approach this.”

The pandemic has no moral logic of its own. The steps that are most likely to revive the economy don’t depend on some abstract notion of what is fair. And outrage that some group you don’t like received help probably won’t make things better.

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Calm before the storm for Japan suicides as coronavirus ravages economy – The Province

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A volunteer responds an incoming call at the Tokyo Befrienders call center, a Tokyo’s suicide hotline center, during the spread of the coronavirus disease (COVID-19), in Tokyo, Japan May 26, 2020.

ISSEI KATO / REUTERS

“There are so many people who want to connect and talk to somebody, but the fact is we can’t answer all of them”

TOKYO — The phones at the Tokyo suicide hotline start ringing as soon as it opens for its once-weekly overnight session. They don’t stop until the lone volunteer fielding calls from hundreds of people yearning to talk signs out early the next morning.

Both operating days and volunteer numbers at the volunteer-run Tokyo Befrienders call center have been cut to avoid coronavirus infection, but the desperate need remains.

“There are so many people who want to connect and talk to somebody, but the fact is we can’t answer all of them,” center director Machiko Nakayama told Reuters.

Health workers fear the pandemic’s economic shock will return Japan to 14 dark years from 1998 when more than 30,000 people took their lives annually. With the grim distinction of the highest suicide rate among G7 nations, Japan adopted legal and corporate changes that helped lower the toll to just over 20,000 last year.

Worried the current crisis will reverse that downward trend, frontline workers are urging the government to boost both fiscal aid and practical support.

“We need to take steps now, before the deaths begin,” said Hisao Sato, head of an NGO that provides counseling and economic advice in Akita, a northern prefecture long known for Japan’s worst suicide rate.

National suicides fell 20% year-on-year in April, the first month of the country’s soft lockdown, but experts said that was likely due to an internationally recognized phenomenon in which suicides decrease during crises, only to rise afterwards.

“It’s the quiet before the storm, but the clouds are upon us,” Sato said.

Prevention workers see echoes of 1998 when a sales tax hike and the Asian economic crisis first drove annual suicides above 30,000, then to a peak of almost 34,500 in 2003.

Economic circumstance is the second biggest reason for suicides, behind health, according to 2019 police data, which also shows that men are nearly three times more likely to kill themselves than women, and most are in the 40-60 age group.

The current crisis, which is forecast to shrink Japan’s economy 22.2 percent this quarter, is especially dangerous for cash-strapped small and medium-sized businesses for whom government subsidies might not arrive in time.

“It’s tough. A lot of people are really worried,” said Shinnosuke Hirose, chief executive of a small human resources firm that has lost nearly 90% of its business. “It’s like waiting at the execution grounds to see if they survive or not.”

A Health Ministry official in charge of suicide policy told Reuters his department planned to ask for more money from a $1.1 trillion central government stimulus package to help fund measures such as extra hotlines. The official, who declined to be named as he was not authorized to speak on the record, added there were limits to central government action and local efforts were crucial.

JOBLESS LINK

Some believe the steps taken in recent years to bring down the suicide rate will hold firm through the current crisis, but others are not so sure.

Kyoto University’s Resilience Research Unit has predicted 2,400 more suicides for each 1% rise in unemployment. If the virus subsides in a year, unemployment could peak at around 6% by March, lifting annual suicides to around 34,000, it estimated. If pandemic conditions persist for two years, a rise to 8% unemployment by March 2022 would see suicides spike over 39,000.

“Of course social support is important … but they won’t be able to ramp this up suddenly,” said unit director Satoshi Fujii. “Preventing bankruptcies will start helping immediately.”

At the Tokyo Befrienders call center, the phones continue to ring. The formerly nightly service now opens on Tuesdays only, with one volunteer a shift instead of four, although it plans to reinstate another day in June.

“Everyone has tried hard to get through lockdown, but now they’ll reflect and think ‘why was I doing it? What hope do I have?’” Nakayama said. “At that time I think a lot could choose death.” (Reporting by Elaine Lies; editing by Jane Wardell)

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Trump’s Economy Will Look Better Than You Think On Election Day – Forbes

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Here’s some bad news for Democrats intent on unseating the Trump administration. While the current economic situation looks dire, a huge bounce back is forecast for this summer and will likely continue into the fall.

At least 12 economists see the economy growing at an annualized rate of at least 20% in the third quarter. Some even see it growing as fast 30% over the same period, according to a recent survey of multiple economists by The Wall Street Journal.

And it is just that sort of economic snap-back that could put President Trump back in the White House for another four years.

Things Look Bad Now

Currently, it might seem hard to see anything good in line for the Trump administration. Millions of people have been fired in a matter of a few weeks. The economy is expected to shrink by 17% in the three months through June, according to Trading Economics. And the death toll from the Covid-19 pandemic is rising. In short, it’s bad, and everyone knows that fact.

But it is the health of the economy that generally dictates how people vote. If there are plenty of jobs, inflation is low, and people feel better off than they did a four years ago, they’ll likely vote for more of the same. That’s what happened with Presidents Reagan and Clinton. Some readers will remember Clinton’s early 1990s campaign quip, “It’s the economy stupid.” That was true then and still is now.

The economic data from the last few weeks are so bad that Democratic Party operatives may be banking on the dire economy to ensure a landslide victory in the fall election. But that hope may soon evaporate as we enter the summer.

Economic Bounce Back This Summer

What probably matters more for many voters is what will happen in the few months before the November election, not the current situation. And that could surprise the world.

Ameriprise Financial AMP  and Nomura Securities International both see an annualized growth rate of 30% in the three months through September, according to the WSJ survey. Another 10 similar institutions, such as CSFB, Scotiabank BNS  and Natwest Markets, forecast the economy will expand by between 20% and 30%.

Other institutions see lower rates of growth and perhaps even continued contraction. The average growth estimate for the third quarter is around 9%, according to the WSJ survey.

However, as long as the lockdowns continue to get loosened, then growth estimates should continue to rise.

Normally an annualized growth rate of 3% would be considered a good reading and would likely come side-by-side with the sustained creation of millions of new jobs each year.

But growth rates of 20-30% are spectacular. Even 9%, the average second-quarter forecast, would be shockingly high in normal times. What’s more, if these forecasts are even vaguely accurate, the growth should create a load more jobs. Exactly how many is hard to judge because there hasn’t really been a precedent for an economic lockdown.

Growth Boom to Continue Through Year End

There is some more good news. According to the same WSJ report, the growth boom is set to continue in the fourth quarter. The highest estimate is for a bounce of 21.5%, with the average at a respectable 6.9%. Again, that continued growth should create another slew of new jobs, many of which will appear before the election.

So what? The likely rebound in economic growth could also help tilt the election toward incumbent President Trump.

A second Trump term could also be a further bullish factor for the stock market because of the administration’s decidedly pro-business approach to the economy and his effort to reduce regulations. In other words, investors should be watching this closely.

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Doug Ford rejects regional approach to reopening Ontario's economy – Toronto Star

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One size fits all.

That will be Ontario’s mantra for reopening the economy in the wake of the COVID-19 pandemic, insists Premier Doug Ford.

Even though the Greater Toronto Area accounts for 65.6 per cent of Ontario’s cases, leaving huge swaths of the province relatively unscathed, Ford is rejecting the regional approach of opening up as is being done in neighbouring Quebec, Manitoba and New York state.

“I have to follow science and the medical advice. I always have, I always will,” the premier said Thursday, emphasizing that provincial chief medical officer of health Dr. David Williams and other public health officials will make the call.

“I’ll take their advice and if Dr. Williams doesn’t think it’s the right thing to do, then I’m following his advice. I have from the beginning. I’ll continue to follow it,” he said.

Ford admitted he is under a lot of pressure to expedite the opening of the economy in regions beyond the GTA.

There are far fewer coronavirus cases in Kenora, Algoma, North Bay, Parry Sound, Sudbury, Kingston, Renfrew, Huron-Perth, Prince Edward County, and most of southwestern Ontario outside the Windsor city limits.

“I hear it at cabinet, I hear it at caucus. I hear it all the time from our own members,” the premier said.

Indeed, Progressive Conservative MPPs from outside the Golden Horseshoe privately confide that they are feeling heat from their constituents.

“How am I supposed to keep telling businesses in my area to remain closed for what’s essentially a Toronto problem?” said one rural Tory MPP, speaking on condition of anonymity in order to freely discuss internal caucus discussions.

“At a certain point, we’ve got to reopen,” added the MPP, who personally lobbied Ford against the universal reopening approach.

But the premier, who began the first phase of reopening the economy last week when stores with street-front entrances were allowed to welcome customers, said “we just have to be cautious” to curb the spread of a virus that has killed 2,248 people in Ontario.

“On a long weekend in the summer, there’ll be half a million cottagers going up to the Muskokas, the Haliburtons, up to the cottage area — and they’re coming, primarily, they’re coming from the 905 and 416 area,” he said.

In Quebec, where 4,228 people have died from COVID-19, Premier François Legault has pushed a phased regional approach to opening.

Outside of Montreal, the epicentre of the pandemic in that province, much of the economy will be up and running next week, including indoor shopping malls.

“We have to continue to be careful because we cannot afford to have large increases in the next few days or weeks in the number of people in our hospitals in Montreal,” Legault said earlier this week.

In Manitoba, where only seven people have died of COVID-19, Premier Brian Pallister announced Tuesday that most businesses — including restaurants, bars, and gyms — will be open next week.

Pallister stressed “slow and careful movement in the direction of easing our restrictions is the right approach.”

New York state has suffered 23,282 deaths — more than 10 times as many as Ontario despite a population of 19.5 million compared to the province’s 14.5 million — but is pushing forward with phased regional reopening.

In New York, a region must meet seven different metrics before being allowed to move a broader stage of reopening, including a sustained decline in total hospitalizations over a three-day rolling average and a decline in deaths.

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Each region must have at least 30 per cent of its intensive care unit beds and 30 per cent of all hospital beds open and must meet diagnostic testing and contact tracing capacity.

Western New York, across the Niagara River from Ontario, currently meets all seven requirements for reopening selected businesses and services.

Earlier this month, Gov. Andrew Cuomo defended his plan.

“Close down everything, close down the economy, lock yourself in the home — you can do it for a short period of time, but you can’t do it forever.”

Robert Benzie is the Star’s Queen’s Park bureau chief and a reporter covering Ontario politics. Follow him on Twitter: @robertbenzie

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