In the last week or so, central bank and government policymakers have made numerous proposals to address economic disruptions stemming from the COVID-19 pandemic. Such policies have included limited unemployment benefits, mortgage foreclosure moratoria, mortgage modifications, credit facilitation through TALF-like purchases of debt, and support for municipalities through money-market mutual fund support. Each approach has been primarily borrowed from the past financial crisis. But the resources and response required to combat a global pandemic are more immediate, more broad-based, and of significantly greater magnitude. Facing wartime-like pressures requires using wartime-like funding mechanisms.
Crisis relief programs sought to relieve panic and anxiety caused by the associated events following the classic three-step approach: alleviate the perceived unpredictability, establish a modicum of control, and reduce the size of the perceived threat.1 The present crisis is not different in that regard.
The economic dislocations arising from the COVID-19 pandemic, however, bear little resemblance to the financial crisis of 2007-2008. That financial crisis was slow in developing and the response consisted merely of providing orderly flows of funds through markets in the beginning and supporting firms facing losses in the end. The COVID-19 pandemic crisis, like a natural disaster, developed quickly and, therefore, requires a much more immediate response. (As any Katrina veteran will tell you, delay is a recipe for panic and riots.) Put differently, the COVID-19 crisis is more akin to a natural disaster than a mere financial crisis. The required response, therefore, needs to be much more broad-based and comprehensive.
Such differences were acknowledged with President Trump’s invocation of the 1950 Defense Production Act last Wednesday, allowing the federal government to obtain necessary resources to address present concerns.
But while some suggest that such powers should be used narrowly to bolster existing medical device production and virus testing, the expenditures need not stop there.
Substantial investment in new medical devices and facilities will also need to be supported. Construction for facilities will need to be financed. Pharmacological development and testing will need investment. The resulting medical-related debt is of a more “corporate” finance variety that can be supplied by a combination of market-based funding and federal support.
Consumer medical debt also needs to be funded. Medical debt is said to be the fasted-growing segment of securitization. According to a recent Kaiser Family Foundation study, medical debt is already a substantial component of consumer credit with lab fees, diagnostic tests, emergency room visits, and doctor visits like those related to COVID-19 diagnosis and treatment constituting the types of medical services most commonly associated with medical debt problems.
While some have suggested floating consumers over the lockdown period with the equivalent of “payday” loans that allow them to borrow for today’s consumption and repay that later, such a concept assumes consumers will have future surplus employment earnings available to pay that debt. Payday lending is already a problem in the US and is not a suitable basis for public policy, even at low interest rates.
The escape hatch is to relieve the need for consumers and businesses to pay bills while they are prohibited from operating (or are otherwise impeded with regard to their ability to work and/or collect billings as their customers and clients hoard cash). Unlike forbearance, the missed payments are tacked onto the end of existing debt to provide meaningful relief rather than paid at the end of the forbearance period.
Such a standstill is the foundation of the “creditor stay” in consumer and business bankruptcy. The concept is also the basis of the “holidays” declared at local, state, and eventually federal levels to stop bank runs in the Great Depression. Such holidays can be extended to markets to allow those to recover as well. Thus, the holiday or standstill is a sound mechanism by which to halt expenditures at roughly the same rate at which income is impeded.
There is no time to assess which economic agents or sectors should receive aid and which should not. Since the effects are global (or at least national), such a standstill has the potential to achieve approximate parity across economic agents on an aggregate basis.
Even a partial consumer debt standstill would be useful. Assuming that investors would still be paid on time even though consumer payments were delayed (in order to limit financial market disruption), a three-month mortgage payment holiday would involve some $180 billion in resources to fund advances at roughly $60 billion per month. That is small compared to the $700 billion in support already offered by the Federal Reserve on the existing base of its $4.7 trillion balance sheet and would provide the type of relief necessary to support pandemic policy.
Such programs do not need to rely exclusively upon the Federal Reserve. Historically, wartime finance was funded by the War Finance Corporation in WWI and the Reconstruction Finance Corporation (“RFC”) (spanning the Great Depression and WWII). Both entities were what we would now call public-private partnerships, being partially capitalized by the US Treasury and then selling additional financing to the public. Both invested in wartime production, with the RFC also funding loans and capital investments in all sorts of businesses. The RFC founded Fannie Mae and the Small Business Administration, which are still with us today. Recently, some on Capitol Hill were calling for an infrastructure financing mechanism based upon similar principles.
Wartime-style efforts to stabilize financial markets need to be undertaken with urgent immediacy. A full (economy-wide) or partial (consumer) payment standstill or holiday would provide great relief to an economy halted by pandemic lockdowns. We need to end Congressional bickering and agree to just stop for a month-long “health holiday” that would alleviate the perceived unpredictability, establish a modicum of control, and reduce the size of the perceived threat of COVID-19. Such a policy appears revolutionary, but, historically, it is not
