Fiscal Policy Still MIA

We are still nowhere near the end of this crisis.

As I write tonight, futures markets have limited down again, setting the stage for another ugly Monday morning. A reported factor in the decline is the failure of the Senate to move forward an economic stimulus bill. That may change tomorrow, but even so it must also pass the House where Speaker Nancy Pelosi can advance her own bill. The politics make it difficult to hammer out legislation quickly this week.

That said, perhaps I am being too pessimistic. Legislators have a strong incentive to get the job done given that coronavirus now strikes a little too close to home. Two U.S. House of Representative members have already tested positive and today we learned that Senator Rand Paul has also tested positive. Senators Mitt Romney and Mike Lee self-quarantined on that news, having had close contact with Paul.

Paul apparently made the curious decision to exercise at the Senate gym while awaiting his test results. Which raises the interesting question of why the Senate gym remains open in the first place? Rather than dwelling on those issues, we should instead consider that we don’t seem to find one case in isolation; others inevitably pop up soon thereafter. So one would think that members of Congress, and in particular the older members of Congress like say Mitch McConnell (78 years old), would be eager to wrap this up and maybe engage in a little social distancing.

The delay will hamper the Federal Reserve’s efforts to fight the turmoil in financial markets. Via Bloomberg, the legislation reportedly included funding for the

…Treasury to use $425 billion of the $500 billion “to make loans, loan guarantees, and other investments in support of programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, states or municipalities.”

This would apparently (unfortunately I don’t have a copy of the proposed legislation) expand the Fed’s ability to create lending facilities to support corporate and municipal debt or even buy such debt outright as they do mortgage backed securities. This would put some considerable firepower behind the Fed’s efforts to unstick financial markets. The sooner the Fed can be more creative, the better.

To be sure, please do not interpret this as criticism of the Federal Reserve. Chair Jerome Powell and his colleagues brought out tools over a two-week span that took years to develop during the last crisis. The Fed has acted with truly impressive speed and I expect it will expand its efforts further. The Fed is not out of ammunition.

That said, the Fed can’t do this job alone and needs the support of fiscal policy. I fear that while we may be temporarily appeased by the initial round of fiscal efforts, Congress and the administration have yet to come to grips with the evolving economic situation. The sudden stop of the U.S. economy is sending unemployment soaring. Initial claims may exceed 2 million this week after state and local governments around the nation began ordering shutdowns of everything except essential services.

My concern is that the fiscal package recommended by the Senate is both too small and too reliant on existing tools to alleviate the damage to household finances and stave off a wave of business closures that would threaten the ability of the economy to bounce back later this year. Other nations are moving much quicker to keep workers on payrolls for an extended period of time. See, for example, the U.K. plan, which pays grants to firms of 80% of salary of employees if companies keep them on the payroll. Moreover, the initial three-month phase would provide some longer-run certainty for firms and employees.

The goal is to keep firms solvent and connected with employees such that the economy can ramp back up after we have some measure of control over the virus (as has happened in China and South Korea, for example). The risk for market participants is the permanent damage to the economy that will occur with insufficient federal support for jobs during this crisis. This is not just another recession; we need bigger and newer tools to mitigate the damage. I am eagerly awaiting the House stimulus plan to see if it moves further than the Senate proposal.

Bottom Line: This week the data will start to catch up to reality and it’s going to be ugly. And beyond that, the coronavirus case load and death count will climb higher; we have only just begun to learn the extent of the spread. We still can’t see to the other side of this, and we can’t yet rely on fiscal policy to support us until we get there. I don’t think this is pessimistic as much as realistic. I have yet to see reason to expect financial markets will stabilize anytime soon.