Sorry, President Trump, the Fed can’t bail us out of this one. Nor can even an audacious plan, like Treasury Secretary Steve Mnuchin’s proposal to simply cut people government checks.
The market signaled its view when it took a steep dive and then managed a modest bounce back after Federal Reserve chairman Jerome Powell slashed short-term interest rates to near zero and launched yet another round of quantitative easing (i.e., printing money).
This may shore up bank balance sheets and perhaps lead to cheaper mortgages. But banks were strong already. And how many people will buy a house amid the coronavirus lockdown?
Old remedies to spur the economy, like adding liquidity to the banking system by cutting rates or printing money or even cutting checks won’t do the trick.
This isn’t just a Wall Street problem or one about personal consumption. Fact is, it’s hitting Main Street hard, in new ways — and that, in turn, has Wall Street scared, especially because policymakers don’t yet seem to understand the difference.
What the stock market is signaling is a desperate need to develop the right policy mix to prevent economic Armageddon that Monday’s near 3,000-point decline in the Dow signaled.
First, Washington must identify who needs a short-term bailout. Start by looking at the balance sheets of cities and states.
If people can’t go out to a restaurant to spend the extra money from their government stimulus check or payroll-tax cut because they’re quarantined or sick, municipal tax revenue will plummet. Cities and states may not even be able to sell debt (the municipal bond market is already signaling this) to pay their bills and workers. New York City and state are already projecting steep drops in revenue for the coming year.
The federal government should be in discussions with governors to see if state and local governments need a Wall Street-like bailout to get through a possible liquidity crisis until the virus panic blows over, people start spending money again and tax revenues recover.
This money might be in the form of federal loans or even the sale of special government bonds to provide bridge loans for cities and states in need. Yes, this would put money into the pockets of states (like New York) that have lousy business conditions because of their high spending and taxation. But the money would be a loan, not a grant, and extended only in the most dire of circumstances, such as a lockout from other financing.
It would prevent disaster: cities and states unable to make good on obligations to workers and get money to those in need — and turning the already-in-progress recession into a depression.
Also in need of immediate, drastic relief: small businesses, which employ nearly half of all Americans.
Again, using my restaurant example: With people unable to eat out, even the hottest restaurants are facing a cash crunch that government checks or payroll tax cuts simply won’t fix.
These places employ a lot of people who’ll be out of work. The financially healthier ones may be able to bounce back after the crisis, but only if they don’t go bankrupt first.
Let’s face it: Agencies like the Small Business Administration aren’t equipped to handle the tsunami-like liquidity crisis that could wash over the small firms. What’s needed is a federal attempt to save these businesses on a scale not seen in years because they can’t be bailed out by quantitative easing and low interest rates alone.
Maybe the Treasury should offer loans that can be financed through the sale of government debt. Or the Fed could work with banks to administer a vast small-business lending program that lasts as long as the virus panic, as former Fed board member Kevin Warsh notes in The Wall Street Journal.
Banks, Warsh argued, are in much better shape than during the last crisis, and they have a vested interest in seeing that small businesses with good credit and sound business models don’t simply disappear — and make any eventual recovery that much more difficult.
Yes, the economy is in trouble, and the country will be dealing with a health crisis not seen in a century. But we can make the landing feel less like a crash if Washington can figure out who needs bailout money the most — and that this isn’t 2008.
Charles Gasparino is a senior correspondent at Fox Business Network
