Why is the market going nuts? What should policy do? I put some of my recent thoughts in a Wall Street Journal Op-ed, here. As usual I can't post the whole thing for 30 days, but if you're clever you can find it.
This is not a "demand" recession needing "stimulus." The economic policy challenge is to allow the economy to shut down, but make sure it doesn't die in the process. The problem is -- once again -- debt.
Had everyone kept a few months of cash around, things would be fine. But many did not. Now we are seeing the beginnings of a scramble for cash, as people and businesses try to sell assets or borrow. But who is buying? And who is lending? Banks can’t make new loans to companies and people with no income.If there is a wave of firing and bankruptcy,
A pandemic can turn quickly to a financial crash and a long recession, not a V-shaped pause. That’s the scenario spooking markets, and it should spook all of us.
What to do? Clearly the central goal of policy should be to keep businesses alive so they are ready to turn back on again.The main focus of economic policy should be
Lending is better than transfers. Since loans must be paid back, larger amounts can go where needed. ...
Forbearance is important. Banks and creditors should not immediately shut down a nonpayer. But they have to be allowed to forbear by their regulators, their own creditors, and their own fiduciary responsibility, and to borrow or pass forbearance up the line....
Rather than give each of us $1,000, allow us to borrow a fraction of last year’s income from the Internal Revenue Service and repay when we file our taxes. That provides more money to those who need it, and helps those even with large debts not to default. Allow penalty-free withdrawals from retirement accounts. Social-program rules must be stretched. If people have to lose a job to get help, we tempt the employer to needlessly fire them, and they and the employer are not ready to start up again fast.This is all really hard. Economists blogging from home are full of good and creative ideas. But changing rules for who banks can lend to, to create pandemic exemptions, is much much harder than writing checks. It would be awfully nice if anyone in government had put the slightest thought into this ahead of time.
We are headed to the second huge creditor bailout. When it's over, we need to start taking seriously that if you're too big to fail, you're too big to borrow. Airlines, this means you.
The Oped summarizes many ideas in condensed form. To see more, use the "pandemic" label below, or this link