U.S. Federal Reserve officials have talked broadly about helping households and firms through the current economic crisis and quickly unleashed trillions of dollars in cash and credit guarantees to build a “bridge” to the post-pandemic world.
But underlying that swift response is a debate over how to ensure the cure for the country’s immediate economic problems doesn’t damage future growth by keeping otherwise failing firms alive, saddling others with too much debt to thrive, or encouraging people to stay in jobs that will disappear.
It’s a longer-term dilemma, to be sure, when the priority is to prevent a wave of personal and business bankruptcies from creating an even deeper economic hole. But it is one the world’s central banks and elected leaders are struggling to get right even as they roll out unprecedented support. A misstep could damage productivity and slow the hoped-for recovery.
“It is a very tricky balance,” Richmond Fed President Thomas Barkin said in a recent interview where he sketched out the paradox U.S. officials face in lowering an unemployment rate that likely topped 20% this month: Federal programs, based on hopes of a short downturn and sharp rebound, have been geared toward returning workers to jobs they held before the novel coronavirus outbreak; but those might not be the jobs the economy demands in a slow-to-recover world with new social norms and entire industries like elder-care likely to be reimagined.
“Some of this has to start with where do you see growth” in the future, Barkin said. His thought was echoed in a recent New York Fed study on how job training programs struggled after the last recession to adapt to in-demand occupations, possibly prolonging unemployment.
‘MAIN STREET’ SET TO OPEN
The Fed is expected by next week to open its “Main Street Lending Program,” which will provide four-year loans to businesses with between 500 to 15,000 employees. The signature program, one of several measures taken by the U.S. central bank to battle the crisis, was announced about two months ago but delayed as officials wrangled over complex details.
Boston Fed President Eric Rosengren, whose bank will administer the program, described the hunt for a sweet spot in which loans are too expensive for firms that “have no problems” while troubled borrowers are weeded out by private banks who must put some of their money at risk for each loan the Fed makes.
“What we are really looking for is firms that were doing fine going into the end of last year,” Rosengren said on Sunday on CBS’s “Face the Nation” program.
At up to $600 billion, the program is the Fed’s most extensive use ever of its credit-creating powers for non-financial firms. Officials expect to avoid losses on the program, and the Fed says its aim isn’t to provide bailouts – a spending issue for elected officials to decide – but to provide a credit lifeline likely to turn a profit for the central bank.
The coming weeks will tell if Fed officials got it right.
LIQUIDITY LESS IN DEMAND
The crisis programs the Fed has opened so far have been largely aimed at the financial sector, and seen only weak demand. The modest take-up is viewed as a success, a sign the central bank’s announcement of support for financial markets convinced investors to keep credit flowing and allow firms like Boeing Co, Ford Motor Co and others to raise money on their own.
Central banks in Europe and elsewhere have seen similar tepid use of “liquidity” programs, which is also viewed as evidence the financial sector only needs to know that central bank help is available if needed, not to actually tap it.
In the case of programs for potentially thousands of firms in the real economy, however, even Fed officials say they expect strong demand – and don’t want to be seen as too strict in the midst of a global crisis.
Other central banks are working through the same issues.
The Bank of Japan has designed a program along the lines of what the Fed is doing. Britain’s experience shows why the details are important. When the British government offered to guarantee 80% of loans banks made to companies to navigate the crisis, banks were still reluctant to lend. When the guarantee extended to 100%, the flow of credit doubled.
What that means for the future will be a core concern for policymakers as the recovery takes shape.
Some economists have begun discussing the legacy of bad debt that may be left behind by the pandemic, and whether the same sorts of programs erected to erase bad loans in the early 1990s savings and loan crisis or the 2007 housing meltdown may be needed again.
For labor markets and business investment, meanwhile, the “reallocation shock” has already begun, University of Chicago economists Jose Maria Barrero, Nick Bloom, and Steven J. Davis argued in a recent paper. They estimated more than 40% of the pandemic-related job losses will prove permanent, and said governments should not encourage workers to wait for their return, for example through programs that extend generous unemployment benefits too far into the future.
The shift to new jobs and industries will “lag the destruction,” they wrote. “Partly for this reason we anticipate a drawn-out economic recovery.”