Updates from Chicago Booth

How the Fed plans to pay the country’s bills
By John H. Cochrane – Public attention in the United States during the first phase of the COVID-19 crisis has been largely on the disease itself, the massive social and economic shock of the shutdown, and how we can orchestrate a safe reopening. But we also need to pay some attention to the financial side of the current situation, and the Federal Reserve’s immense reaction to it. Whatever one thinks of that reaction, it’s important to understand what the bank did, what beneficial and adverse consequences there are, and how our financial and economic system and policies might be set up better in the future.

We face a severe economic downturn of unknown duration. If it is something other than a V-shaped downturn spanning months rather than years, there will be a wave of bankruptcies, from individuals to corporations, and huge losses all over the financial system. “Well, earn returns in good times and take losses in bad times,” you may say, and I do, more often than the Fed does, but for now this is simply a fact.

Our government’s basic economic plan to confront this situation is simple: the Federal Reserve will print money to pay every bill, and guarantee every debt, for the duration. And, to a somewhat lesser approximation, the plan is also to ensure that no fixed-income investor loses money.

To be clear, my intention here is not to criticize this plan. From a combination of voluntary and imposed social distancing, the economy is collapsing. Twenty million people, more than 1 in 10 US workers, lost their jobs in the first month of the COVID-19 shutdowns. That’s more than the entire 2008–09 recession, all in the course of three weeks. A third of US apartment renters didn’t pay April rent. Run that up through the financial system: most guesses say that companies have one to three months of cash on hand, and then fail.

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If you want to know why the Fed hit the panic button, it’s because every alarm went off.

Is the plan really to try to pay every bill?

Yes, pretty much. This is not stimulus. It is “get-through-it-us.” People who lost jobs and businesses that have no income can’t pay their bills. When people run out of cash, they stop paying rent, mortgages, utilities, and consumer debts. In turn, the people who lent them money are in trouble. Businesses with zero income can’t pay debts, employees, rent, mortgages, or utilities either. When they stop paying, they go through bankruptcy, and their creditors get into trouble. If you want to stop a financial crisis, you have to pay all the bills, not just hand out some cash so people can buy food.

And that’s more or less the plan. more>

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