Broker Check

Government Response to Coronavirus

| March 23, 2020

Recent developments are showing that some parts of the government learned valuable lessons from the 2008-09 recession while others are struggling to come to terms with the proper policy response. If history serves as an indicator, they will eventually act to help the nation deal with the economic threat from the virus, but until then the uncertainty over policymaker’s ability to craft an effective response may continue to roil markets resulting in additional damage to the economy.

On the bright side, the Federal Reserve has clearly learned important lessons from the financial crisis. The Fed learned that the faster that it can provide the financial system with the liquidity that it needs to function properly the better. In addition, the Fed learned that the only limit on the amount of liquidity injections should be inflation pressures. As long as inflation is in check it is important to offer a large enough amount of asset purchases to make sure that financial institutions with high-quality assets can convert those assets to cash when needed. The Fed also learned that it is better to offer too much money and allow banks to choose not to use it rather than too little which may cause concerns about short-term funding availability. These lessons have likely influenced the Fed’s decision to offer quantitative easing of “in the amounts needed” rather than listing a specific limit. The Coronavirus may create a lot of challenges for the economy but a 2008 style liquidity crisis for financial institutions is unlikely to be one of them due to the Fed’s quick and decisive action to alleviate the risks.

Congress, on the other hand, seems to have forgotten the lessons from the past crisis. Remember when Congress voted down the Troubled Asset Relief Program (TARP) only to watch the financial markets tumble and several more banks fail in the hours following their failure to act? Only after this damage was done did they hurry back to the floor to vote again and this time approve the bill.  One has  to  wonder  if  the  financial  crisis  would have been less severe had they taken decisive and coordinated action to provide the country with the assurances it needed rather than fighting over the details. Then after TARP was passed Congress added so many stipulations to the support that it was difficult to get the money out into the economy quickly. Current Federal Reserve Governor, Neil Kashkari, oversaw administering TARP. In a recent interview he lamented that the TARP program was too slow to disperse the money authorized by Congress and often could not get the money to the areas of the economy where it was needed most because of bureaucratic red tape. His advice is to use existing payment mechanisms, such as the Social Security Administration, IRS, and unemployment system to get payments to the public quickly. In addition, the Small Business Administration and direct loans from the Treasury can help businesses stay solvent. So far Congress seems to be ignoring this advice as the planned stimulus bill continues to fail to advance in the Senate and the House prepares to take up its own bill due to differences in opinion as to how the funds should be distributed to different groups.

So how much additional damage will be done to the economy before Congress acts? If history is any indication, they will drag their feet and play politics until the last second, but a deal will get done.

However, the nature of the bill will be important. If too many stipulations are attached to the stimulus it will incentivize individuals and businesses to wait until they have no other options to ask for help. This will prevent the stimulus from getting out into the economy quickly and will cause the economic slowdown to drag on. In this environment speed is most important, effectiveness is a secondary priority, and appeasing special interests should be of no concern. Unfortunately, for now, Congress seems to have the order of priorities reversed.