TEKNOIOT: pandemic
Showing posts with label pandemic. Show all posts
Showing posts with label pandemic. Show all posts

11 Jun 2020

Airline bailouts and capital regulation - Barokong

The airlines are about to get a huge bailout. Why are they in such trouble? Well, yes, nobody is flying so their revenues are cratering. But why not just stop flying for a while? The answer is, they have loads and loads of debt.

U.S. Airlines Spent 96% of Free Cash Flow on Buybacks writesBrandon Kochkodin on Bloomberg

American Airlines Group Inc...led the pack, with negative cumulative free cash flow during the decade while it repurchased more than $12.5 billion of its shares. United Airlines Holdings Inc. used 80% of its free cash flow on buybacks, while the S&P 500 Index as a whole allocated about 50% for the purpose. As the industry reels under the weight of the coronavirus outbreak corporate leaders are seeking federal assistance to ease the burden.
Let's be clear. It is a myth that buybacks are bad because they reduce investment. And free cash flow isn't a very interesting divisor. But buybacks do have a downside: they reduce equity and increase debt. Fine if you and the creditors are willing to take a bath in bad times. Not good if debt means taxpayers have to bail out in bad times. Too big to fail is spreading like a virus.

If airlines were financed by equity, they would have a natural shock absorber. They could just shut down, stop paying dividends, and then wake up on the other side. But they have debts to pay, and if they don't pay creditors will take them to bankruptcy court, seize assets, break them up and there won't be airlines when the virus is over.

Enter the federal bailout, as always really a bailout of the creditors.

Does this all sound like banks 2008? It is.

If we are going to bail out airlines then there needs to be subsequent capital regulation. Once bailed out you cannot finance yourself on a mountain of debt next time around.  Issue equity, retain earnings.

Everyone is watching. If debts lead to bailouts with no consequences, there will be more debts and more bailouts. Yes, even now we have to watch moral hazard. We are setting precedents for the next larger pandemic.

The only reason the economy is in trouble is that not enough people and businesses kept cash reserves or plans to weather a shut down. If the ants bail out the grasshoppers without consequences, we will enter the next crisis with nothing but grasshoppers.

If there is going to be a bailout this consideration makes it ever more important that the government lends money, or invests, and is paid back first before any current creditors or stockholders. Don't just send a check.

28 May 2020

Stimulus or stimu-lend? - Barokong

Jason Furman wants stimulus:

Congress should pass a simple one-time payment of $1,000 to every adult who is a U.S. citizen or a taxpaying U.S. resident, and $500 to every child who meets the same criteria.
Here's a better idea. The IRS should allow anyone to borrow up to $10,000 against future tax payments, with interest. The IRS has an excellent collection mechanism.

The medicine should fit the disease. Jason's logic seems to be good old aggregate demand -- the answer is the same, only the questions change.

As I think about a pandemic, shutting down the economy is most likely to cause liquidity problems. The key is to keep businesses alive and not force them to formally fire people, so they're ready to start up again. My version put more money in the place where it's really needed,  measured by people's  willingness to pay it back.

If you believe money  doesn't grow on trees, deficits must eventually be repaid, and that money should go where it is needed, this seems like a better idea.

Update: Paul Kupiec advances a similar idea

Bugs - Barokong

Do we have your attention yet? I ran across the Cambridge Centre for the Study of Existential Risk, which thinks about the tail events that could destroy civilization.

Here is a nice thought to keep you up at night, given how  unprepared our governments have revealed themselves to be. It's an old thought, but perhaps one our governments will start to take more seriously:

there is a trade-off in natural pandemics between transmissibility and lethality – if a pathogen kills its host too quickly, the host can’t infect many other people. But due to biotechnological advances, it may soon be possible to engineer pathogens to be more infectious, more fatal, and to have a delayed onset – and so be far more dangerous.
New breakthroughs like the targeted genome editing tool CRISPR-Cas9 are increasing our capabilities; and the cost of DNA sequencing/synthesis and the hurdle of expertise are rapidly decreasing. ...
An engineered pandemic could escape from a lab, or it could be deliberately used as a weapon. During the 20th century several countries had state-run bioweapons programmes, and we know of several non-state groups that have attempted to acquire bioweapons.
Almost singlehandedly, one postdoc was recently able to recreate horsepox (similar to smallpox, which killed 300m in the 20th Century) from scratch in only six months. Capabilities that were once only in the hands of governments will soon be within reach of non-state actors.
A novel pathogen, designed to be deadlier than anything in nature, could severely affect the entire world. As Lord Rees has said “The global village will have its village idiots, and they'll have global range”.
Now think about a terrorist group or a country developing both the virus and the vaccine, which would take a year to develop otherwise. It's like a James Bond movie, except entirely realistic.

27 May 2020

From pandemic to financial crisis? - Barokong

Yes, the stock market is jumping around, but Treasury markets are also going a bit nuts. And the NY Fed is pulling out the Bazookas:

Today, March 12, 2020, the Desk will offer $500 billion in a three-month repo operation at 1:30 pm ET that will settle on March 13, 2020.  Tomorrow, the Desk will further offer $500 billion in a three-month repo operation and $500 billion in a one-month repo operation for same day settlement.  Three-month and one-month repo operations for $500 billion will be offered on a weekly basis for the remainder of the monthly schedule.  The Desk will continue to offer at least $175 billion in daily overnight repo operations and at least $45 billion in two-week term repo operations twice per week over this period.
In English, you can get cash quick by parking  your treasury securities to the Fed. And the Fed is getting ready for huge amounts.

These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.
If I read this right, we're looking at a cut to 0.25% very soon.

A pandemic should be one grand stay-cation. (Writing here about  the economy, and those of us who do not get sick. It is of course combined with a health care disaster, which I don't write about for the simple reason that I'm not a pandemic health policy expert.) The economy shuts down as it seems to do over Christmas - New Years, or Europe in August, and then starts right back up again. Except people and businesses make sure they have cash to pay bills over the vacation. If the US follows Italy to a national shutdown, businesses start to fail, banks get in trouble, here we go. I think these are signs of a flight to cash starting up.

As far as I know the "stress tests" never asked "what are you going to do in a pandemic."

Informed commentary from market participants is especially welcome. Thanks to correspondents for both of these links, which I do not regularly follow.

Area 45 pandemic podcast - Barokong

For you podcast fans, here is a longer podcast with Hoover's Bill Whalen on economics and the pandemic. It clarifies some of my evolving thoughts -- more lending, less bailout.

The pandemic is quickly threatening to turn in to a financial crisis. I'm brooding on that for upcoming posts.

If you're not worried yet, read here


26 May 2020

pandemic and protection - Barokong

A pandemic can have useful side effects, one being that it makes us see the costs of protection.

Next up: how do you stop people from hoarding ex ante? Answer, commit that there will not be the usual price controls and rationing ex post.

Thanks to a correspondent for the link.

The market to the rescue - Barokong

I've been worried that businesses can't get loans to keep going during a virus shut down. Everyone seems to be jumping to the idea that we need rivers of Federal money.  Maybe I should have more faith in the free (well, this is banking, but somewhat free) market.

(Thanks to an anonymous correspondent for the tip.)

Monetary policy and coronavirus -- French edition - Barokong

Vox-Fi put up an edited version of my monetary policy and coronavirus post, in French,La politique monétaire en réponse au coronavirus

Un collègue et moi avons discuté de la question suivante : la Fed (Federal Reserve, la banque centrale des Etats-Unis) devrait-elle baisser ses taux d’intérêt en réponse au coronavirus?
Plus généralement, supposons qu’une pandémie devienne grave et que, par choix ou par décret, une grande partie de l’économie s’arrête pendant quelques semaines ou mois. Qu’est-ce que la Fed, ou toute autre politique économique devrait faire à ce sujet?

Practice your French. Read the whole thing here

25 May 2020

Groundhog Day virus plan. - Barokong

Via Marginal Revolution, a very clever idea from Scott Ellison:

I propose temporarily stopping time. This means that today’s date, Tuesday, March 17th, 2020, will remain the current date until further notice. This also means that everything that happens in time (e.g. mortgage due dates, payrolls, travel bookings, stock market trading, contractor gigs, concerts, sporting events) will be paused. It also means that all of these events remain on the books, and will continue as planned once time is resumed.
I mentioned "the debt clock keeps ticking when the economy shuts down" as the central problem, but didn't go as far as to advocate this simple solution. (Which I still don't, read on.)

The central problem is really a coordination problem. A owes B money. A is shut down so can't pay. B understands and would be happy to wait until the crisis is over. But B owes C money, so can't wait. And on down the line it goes. It's like daylight savings time. We could individually decide to move things an hour earlier in spring, but mostly A wants to show up at work when B will be there. There are lots of coordination problems like this, and a useful function of government is to solve them.

But the economy is not completely shut down. Food and medicine need to keep going, and need to be paid! If we literally stop all payments, shutting down the ATM machines, credit card machines, and salaries of the 80% or so who will keep their jobs, we create an insane mess. So some clocks shut down and some others don't and now you have a mess on your hands.

So while this is a useful metaphor and guide to a central problem now, it's not a practical solution.   An economy is much like a human. We can sleep, but we can't freeze the clock, shut down totally and  restart again.

I think really this is a metaphor for widespread forebearance, and we can see  a hint of this in what the government is already doing -- no evictions, urging banks to forbear loans, for example.   Widespread debt forbearance in crisis is an age-old tradition.  Courts sort of shut down, and decide in a rough and ready way which bills and contracts will be enforced right away and which won't. It does, however, stop somewhere, ending up in C art D's lap. It usually means a transfer from whoever entered the crisis not immensely leveraged to those that did.

Again I am reminded of Graham Allison in understanding what's going on.  Bureaucracies cannot innovate much in a crisis. You only get the options they have rehearsed. Our government has rehearsed a replay of 2008 stimulus and bail out, and that's what we're mostly getting, though a virus and government-imposed shutdown are a totally different economic problem than a bank run. Adding ex-post  forbearance clauses to lots of -- but not all --  debt contracts and payments is a nice idea, but needs much more fleshing out than a pronouncement from the President that the clock has stopped.

But save your clever ideas. In the aftermath, our job as economists is to write the playbook for next time. There will be a next time. Let us do a better job than the mess of bailout, Dodd-Frank regulation, stress tests, macro-prudential policy, QE, and the rest that remains the playbook left behind from 2008.


Update: on how bureaucracies cannot innovate in a crisis.

Unemployment insurance pandemic conundrum - Barokong

Should the government make unemployment insurance more generous and easier to get in the pandemic recession? Well, yes, but it's not ideal, and a good point on which to ponder the difference between a pandemic recession and a conventional recession.

To get unemployment insurance, you have to actually lose a job (in most cases) and you are supposed to be looking for a new job. In the pandemic recession, lots of people will be temporarily furloughed - -think airline pilots or flight attendants. But assuming, and helping to ensure, that the economy comes roaring back, we don't want airlines to fire pilots and flight attendants, and we don't want them walking around looking for new jobs at other shut down businesses. It would be  much harder for airlines to get going again; the employees lose health insurance (!) and other benefits, and people out looking for work are spreading viruses around.

Yes, there are some open jobs now. Amazon is looking for workers, as much activity moves online. Anyone with medical skills should be helping at hospitals. And face-mask and sanitizer companies are hiring. But this cannot make up for the large number of Americans who will be sitting on the sidelines for a few months.

So, we want unemployment and other benefits for people who aren't technically unemployed, but whose companies are shut down for the virus and can't afford to keep paying them.

Why don't we always have that, you might ask? Well, our social programs have a lot of rules and for good reasons -- to manage the inevitable unintended consequences and moral hazards of normal times and normal recessions. Government paying salary and health benefits of furloughed workers would give companies a big incentive to routinely furlough employees instead of giving them vacations. Around the world, unemployment insurance and many other benefits are  coupled with job search or training requirements, to avoid the massive overuse experienced before those requirements were put in place. But we don't want them now.

So our problem is that a pandemic shutdown requires a different set of detailed micro rules and regulations about who get what when. Good old Keynesian stimulus and standard automatic stabilizers are completely inappropriate. Incentives matter, now as much as ever, not just cash.

Here we economists are very clever. Marginal revolution links to many clever ideas to get us through the crisis, new programs and new rules and new ways of getting money to where it is needed. I've blogged a few dozen clever ideas too.

But it is nearly impossible to ask bureaucracies to make things up on the fly in a crisis, and invent an implement new rules in a matter of weeks, even if politicians could agree what those programs should look like. This is the lesson of Graham Allison's Essence of Decision masterpiece on the Cuban missile crisis. (If you're looking for good self-isolation reading this is a great one. It also shows how important it is to have a President who can make cool decisions in a crisis, when all his or her advisers are screaming nonsense. The many pandemic books are also great reading. We have been here many times before and it's always the same chaos.) That is the lesson of 2001, when we discovered that half the emergency responders didn't have the other half's phone numbers. That's why when this is over, we need a serious pandemic economic plan, one that gets practiced and refined, and not just another big report that gets shelved and forgotten.

At the cost of repetition, there will be other pandemics.

WSJ oped on virus policy - Barokong

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


Anies Baswedan