photo by Mike Mozart
“This is going to be the first economic cycle in history when people sold gold and Treasuries to buy toilet paper,” I wrote to a colleague the other day over our firm’s instant messaging system.
“Haha yeah it’s weird times,” replied my colleague – who had just shared his relief at having procured “32 mega-rolls of Charmin.”
Of course my co-worker did not literally sell any securities or commodities in order to stock his pantry. But across America and around the world this week, we saw a panicked rush to convert almost any readily saleable asset – except food staples, medical supplies and hygienic paper products – to cash. The effect was as if the entire world was preparing for a global hurricane or blizzard that was forecast to linger for months.
When we look back on the COVID-19 pandemic in the future, I expect most of us are going to remember the hoarding and the memes. But the idea that these will be the pandemic’s main legacies assumes the financial contraction associated with the novel coronavirus will be roughly as transient as the pandemic itself. Whether this proves to be the case will depend on how governments and businesses apply or alter prepandemic policy decisions. It will also depend on the decisions they’re making right now.
The pandemic is not like a war, a major earthquake or a wildfire. It will not destroy large quantities of physical capital. With its mortality largely concentrated among adults beyond typical working age, it will not cost an economically significant amount of human capital either, in spite of the increasingly distressing humanitarian toll.
Our infrastructure and the workforce will come through the pandemic pretty much unscathed. The question is whether the corporate and financial structures through which we organize our economic life can do the same. If they do, recovery is apt to be strong and swift. If they don’t, it will be slow and halting, and people will continue to suffer long after we conquer or contain the virus.
Large companies are stockpiling cash by drawing on preexisting bank credit lines, idling facilities and laying off staff. Many of those same large companies are heavy users of the commercial paper market – a place to borrow money for short periods from money market funds and other institutional lenders. Some businesses will be vulnerable if they can’t roll over their commercial paper. Their institutional lenders, however, may not be in a position to buy their new debt. Instead, they have to meet cash demands from investors who want the funds readily available for their own business needs – or to buy another case of toilet paper.
The Federal Reserve intervened in the money markets on Wednesday, as it did at the height of the financial crisis in 2008. But its powers to do so, even with the approval (quickly granted) of Treasury Secretary Steven Mnuchin, are limited. This is largely due to some ill-considered policies imposed after the financial crash. At the time, Washington was searching for political scapegoats and “bailout” had become a dirty word. So, this week, financial markets were left to wonder whether the Fed will be able to step in quickly and forcefully enough to keep sound businesses from failing due to factors completely outside their control.
Unlike large companies, households and smaller businesses do not have access to commercial paper funding. They rely on banks. But banks were made the biggest scapegoats of all after the financial crisis. Some were even penalized for the actions they took, such as merging quickly with failing institutions, specifically to help officials deal with the crisis.
Now we need the banks once again to deliver financial aid, such as loans backed by the Small Business Administration. Such aid could be crucial to rescuing the thousands of restaurants, retail shops, bars and other small businesses that may otherwise soon fail as authorities force them to close their doors and tell their customers to stay at home.
But the banks have every reason not to answer the phone when officials call to ask them to use their capacity to process and deliver government-backed loans quickly to get us through the crisis. Some of those loans will inevitably go bad. When banks call on government to fulfill its guarantees in the future, they can expect to get the blame for making the bad loans in the first place.
If they answer their phones at all, the banks may tell the government to go make its own loans – for which it has almost no existing capacity. This, in part, is why politicians are now talking about mass-mailing checks that some recipients will not need and that others will find much too small to help. Mailing out checks is one thing the government knows how to do. But it is hard to blame financial institutions for declining to expose their corporate necks after the way the government treated them not very long ago.
Financial institutions will still try to help in other ways, of course. Some are already offering a degree of forbearance on mortgage payments, auto loans and credit card debt. Federal housing lending agencies have said they will suspend foreclosure proceedings against homeowners who fall behind during the next couple of months. But institutions can do much more. First, they need to know they have the full support and vast resources of the federal government standing behind them. And they need confidence that the government that stands behind them will not stab them in the back once the crisis has passed.
Ordinarily we want our businesses to last and our toilet paper to be consumed as needed. This week a lot of people were more willing to put their money into toilet paper over fears that solid companies may soon be flushed away. For real recovery to start, this inversion of priorities will have to stop.