“The lending programs ended up being overly conservative and not really playing much of a role at all. Hundreds of billions of dollars that could have been helping the economy didn’t.”
How do you assess the government responses to the economic crisis caused by COVID-19?
Largely, what people did was take things off the shelf that worked pretty well in the 2009, 2010 period. In some cases, that meant using the tool for the last crisis on this one, because it was the tool we had available immediately in the toolbox.
I think there has been one significant mistake that’s been made in the United States on the economic policy side. Most of the early response by the Federal Reserve was terrific and exactly the right thing for them to do. They were fast. But then, at the next stage, after the government quite correctly passed a $2 trillion-plus economic rescue bill called the CARES Act, some of the implementation of that legislation could have been better. Ultimately it was the fault, in my view, of Treasury’s overly strict interpretation of their backup authority for the Federal Reserve to do lending programs.
Those lending programs ended up being overly conservative and not really helping that many companies—or playing much of a role at all. Hundreds of billions of dollars that could have been helping the economy didn’t. That, I think, was a major error. And it was a little surprising because up until that point, it really looked like there was a lot of momentum to do these things aggressively.
Another thing we learned was just how important it was, worldwide, to make the programs designed to quickly get help to small businesses and their employees exceptionally generous. Even the smallest amount of concern about moral hazard or about giving money to the wrong people was sufficient to totally gum these things up.
Early on, the government needed to recognize and make decisions about the difference between doing some a tailored, complicated form of stimulus and doing a rescue. If it’s a rescue, that requires that we hand out the food and other staples as quickly as possible without requiring people to fill out forms in triplicate.
I think that we were, in many places around the world, not sure which of those two things we were doing and thus did not get relief out there as quickly as we could have to the people who needed it.
Were there similar themes in the 2008-2009 crisis, about the importance of not getting caught up in worries about moral hazard in the moment of crisis?
Yes. Some of those themes have repeated, although here, in many ways, they were simpler. In the last crisis, there was backlash against the idea of bailing out the banks who had played a role in creating the problem. There were no bad guys early on in the pandemic. So the reluctance was less about feeling that the wrong people were going to get helped and just about a generic concern that you wanted to have an efficient form of policy. But when what you’re doing is a rescue, concerns about targeting your policy to get to exactly the right places are perhaps not helpful and sometimes even counterproductive. They work at cross purposes to what you’re trying to do.
Do you think the Fed had more authority or freedom to act this time after playing such a large and aggressive role in 2008-09?
I’d say I give the Fed an A, in the fact that they reacted really quickly and they used their entire arsenal, which is what you need to do. I think they were aided by the fact that, again, there was no sense in which what they were doing was a bailout of fat cat bankers. That’s not what it looked like. That enabled them to have more freedom to unleash their arsenal on the problem than maybe they would have.
We haven’t seen political backlash against the Fed here and that’s for good reason, but they easily could have been gun shy. In a different world, the Fed could have been worried, based on what happened 10 years ago, and held back. That would have been a terrible mistake. They did not.
I credit that it’s a bipartisan set of people who have been appointed to the Federal Reserve. It’s a non-political entity that was not engaged in any form of partisan positioning itself. It just did what it needed to do and I’m very pleased to see that.
We did, however, see Treasury hold back after the CARES Act was passed. I don’t know whether that was due to political concerns or a principled ideological position about government spending. But for whatever reason it was, I think it was a mistake. The goal should have been to push back as hard as possible on what was and continues to be a gathering crisis.
“You have is a large swath of consumers who will not return to their normal activities until they feel safe. That places a pretty hard cap on how much the economy can recover.”
How do you see this continuing to unfold as a financial crisis? Where are we in it?
The hopes for a V-shaped recovery have always struck me as being way overoptimistic. At its core, stripping away shutdown orders and the closing of certain types of businesses and schools, what you have is a large swath of consumers and workers who will not return to their normal activities until they feel safe, which likely means until there is a widely available vaccine or until so much time passes that the virus is no longer endemic. For example, my wife’s parents are living with us. They’re not going out to any restaurants. They’re not going out and spending any money. They’re not going to do that until they’re safe.
So that places a pretty hard cap on how much the economy can recover. It’s not all going to come back, because this is not just about an aggregate demand shortfall where if we all just woke up and decided we’re OK, we can fix it. It’s more than that.
It’s almost like a productivity shock of some sort, or a taste shock. It’s like everyone woke up and decided that they don’t like the taste of certain foods and they’re not going to eat them. You’re going to get a realignment when that happens.
Put that on one side. On the second side, you have the fact that there’s a real loss. The economy lost a chunk of production, and we are still sorting out who will bear that loss going forward.
Some of that loss is being borne by the most disadvantaged among us, as is unfortunately usually the case. I applaud efforts to protect those folks. But in some cases, the efforts to protect those folks have taken the form of unfunded mandates on different actors in the economy, such as telling landlords they can’t collect rent or certain bills won’t get paid or banks can’t collect on certain loans. You’re asking certain stakeholders in the economy to bear the loss, instead of all taxpayers banding together to help the disadvantaged. That then needs to work its way through the system.
I have some concern that $3 trillion of commercial real estate on the books of banks is in some danger, because tenants either can’t make payments or are going to negotiate lower payments. Thus, we may see a fair amount of non-performance on a very large loan book and the banks with those concerns then pulling back or, God forbid, actually having solvency concerns.
That’s just the most obvious, big matzo ball that’s out there. There are others.
There’s no step along the way that seems obviously bad. If a small business can’t make its rent payments, we should have some way that they can get some sort of forbearance on that. But ultimately, someone needs to eat that loss. If it’s a big bank eating it, OK. The government, in principle, helps out the big banks, so they can be part of that solution. But if we then don’t have the political capability of easing some of that burden on banks, which we may not, then we can have a lot of trouble down the line.
If you assume that, at least until this time next year, you don’t have a lot of wealthy senior citizens out there spending money in their normal consumption patterns; you have a whole set of workers who really are unable to perform their jobs normally—and that has nothing to do with what government is in power or what governors are saying, but just choices that individuals make about their own health—you’re going to have a lot of other places in the economy that simply can’t hold on.
Already, we are seeing that, with the expiration of certain types of aid that the U.S. government was giving, there are businesses that are going to need to close for good. Those businesses have a lot of connections to other businesses and to customers.
Does that create a challenge for the financial system, that they don’t know where the risk might be?
Well, they might even know, but there’s not a whole lot they can do about it.
Let’s just say, for example, one were to pass a very well-motivated, big-hearted rule, a law saying there can be no evictions of any kind for the next six months. Now in that world, there’s a whole bunch of businesses and people who simply are unable to pay, who will no longer be evicted from their homes. That seems like a good thing.
But then, the people they were going to pay may not be able to pay back their loans. And furthermore, a lot of businesses or individuals who could pay may not because they can’t be evicted. They’ll use this as an opportunity to negotiate better terms or just not pay. In that world, it’s hard to predict.
You know what the risk is. You know all of the exposure you have to these things. You don’t know exactly who won’t pay, but it’s pretty easy to see that if x percent don’t, that you might be out of capital.
It’s the government providing the rules, saying you don’t have to pay, but it’s not the government saying, “You don’t have to pay me, the government.” It’s the government saying, “A doesn’t have to pay B.” But what happens to B? And then what happens to C that B has to pay?
So, I have real concerns about that over the next year. I think no matter what party is in power, the politics of helping the Bs and the Cs in that equation are going to be complicated. It could turn into a political free-for-all.
Is there any historical precedent you look to for thinking about how long things like this take to work through the system?
No. Certainly in the modern, post-World War II economy, there’s been nothing like this, nothing even close. In its effect on the broad macroeconomy, it’s already significantly larger than the global financial crisis was and likely to have just as long a tail as that did.
There’s no magic wand. There’s no magic wand that gets my in-laws to go out to a restaurant next week. In the absence of them going to a restaurant, there’s no magic wand that keeps all the restaurants in business and their workers employed and thus able to pay their rent, and their landlords then able to pay for their loans.
So we have to figure out a way, as a society, to deal with that. To take people who have jobs, who are lucky enough to still have their jobs, like you and me, and force us to pay a higher portion of our current wages to support people who can’t work, rather than just force it upon some segments of the economy.
There are all kinds of issues about inequity throughout this. Do you see that as another long-term risk?
Inequality is a long-term trend that, frankly, is exacerbated and made plain by what’s happening here. I suppose one could imagine certain types of economic disruptions or health disruptions that didn’t disproportionately strike the poor and disadvantaged. But most, I would imagine would and this one is not an exception.
Thus, to the extent that you believe, as I do, that other things being the same, a more unequal society is a less happy one, collectively, for all of us, this has made that worse.
If this pandemic were something that was taking equally from everybody, that would be bad enough, but the fact that it is exacerbating already existing inequalities makes it that much more painful and makes it that much more difficult to combat.