How can banks possibly figure out who to lend money to?
Quick answer: they can’t.
In order to know that they’d have to have some idea of how much deeper the disruption of daily life in America is going to go.
And to know that they’d need to know how many people the virus is going to impact physically. And how many are already infected.
And how long will businesses have to be shuttered, at least temporarily? And how many people will lose their jobs? And how many people (and small businesses) will stop being able to pay their bills? And for how long: a little bit of time, or forever?
Time frames keep getting longer. Answers keep changing. The White House now seems to be going with a projection by infectious disease modelers and analysts in Britain. Their report shows Coronavirus deaths in the U.S. peaking in mid-June after rising sharply in May, and not really falling off until the end of the summer. And that’s the worst case scenario. With mitigation and/or suppression, cases might not peak as dramatically, and would likely spread out over many more months. Until development of a vaccine, the virus would likely spike from time to time, leading the medical analysts to suggest rules might at times be relaxed, but then reinstated as infections rebound. Leading us to envision something like the color-coded terrorism threat levels we saw after 9–11.
The same report shows impact lessened significantly by rigorous adherence to school closings, work from home, and strict quarantine if infected. And additional “social distancing” for those over 70 years of age. Interestingly (unless we’re reading this wrong), while the White House recommends gatherings of no more than 10 people, the British analysts posit: “Stopping mass gatherings is predicted to have relatively little impact.” So much so that they don’t even include it as a variable in their findings. They say that’s because the time people spend at those type of events is relatively small to the amount of time they spend at home, school, work or in bars and restaurants.
From Trump’s latest briefing:
“It seems to me that if we do a really good job, we’ll not only hold the death down to a level that is much lower than the other way had we not done a good job. But people are talking about July, August, something like that. So it could be right in that period of time. Where I say ‘it washes through’. Other people don’t like that term. But where it washes through….We’ll see what happens, but they think August, could be July, could be longer than that…”
So despite the President’s customary vagueness, there may be more about the virus that’s becoming a little more predictable (of course we won’t actually know for sure if the projections are right before they do or don’t happen), and that’ll be absolutely necessary for the economy to get back onto any kind of path to recovery as well. Apple for instance has reopened stores in China because there are good counts now of Coronavirus cases there, with seemingly credible evidence the rate of infection is going down. (At least credible enough to convince Apple.) But the U.S. still really has no idea how many cases it’s got.
Yes, banks assess risk all the time as part of their normal course of business, but this is so far beyond that. And when they can’t use the tools they’re familiar with to determine what’s likely to happen in the future, banks freeze. And the economy locks up.
Which is why—as we’ve discussed in our last few columns—the Federal Reserve has been working so hard to stop that from happening, and should not be lambasted–at least not right this sec–for “taking care of bankers and no one else”. Because the Fed is pretty much alone so far in trying to take care of a broad swath of American society, at least in terms of preventing economic collapse.
For banks to lend money to people (or small businesses), they have to have a reasonable assumption those people are going to pay them back. But right now they have no way of knowing that. Zero. Even if it’s someone who’s been a good customer before. And a lot of people are going to need money at least to tide them over for a few months, maybe even more.
So part of what the Fed’s recently been trying to do is make it very easy for those banks to push those loans out a couple of months at least, even if they don’t get paid back right away, without hurting them too much.
In some ways it’s similar to what public health officials are trying to do with the virus: help “flatten the curve” so some people will hopefully be getting back on their feet again by the time others get sick, or in this case in dire financial straits. And while some will fail, if those failures are more spread out, the economy shouldn’t all come crashing down at once.
What we’re also seeing is it’s extraordinarily hard to convince banks to do this. They’re more inclined to do “social distancing” of their own: that is, distance themselves from making loans that may potentially turn out bad.
Which means the Fed can’t ultimately succeed without the timely help of Congress and the White House. Yet here is where you may start to see some naked inequity in who gets helped and who doesn’t. Airlines will get bailouts. Are they too big to fail? Probably not, but transportation is essential to the global economy. (Trump has said he hopes this virus will compel people to travel less overseas in the future and spend more vacation time—and dollars—in the U.S.) Cruise lines will also get help, probably. Should they really? And you can bet casinos will get lots of federal dollars: Trump’s good friends with several casino owners, some of whom are his biggest supporters. And Democrats too have a powerful figure protecting that industry in the form of former Senate Majority Leader Harry Reid, who’s from Nevada.
Will some of this just be flushing away money on people and businesses who don’t really deserve it? Yes. But in some ways it may be best to just cut those dollars loose, because as long as some of the money is well-spent, big cash influxes can only do more good than harm to the economy at this exact moment in time. At the same time, why not at least also boost industries that could really do some good right now, even if they’re not as deeply troubled, but might need to shift their business models a bit to really be helpful: like shippers and freight forwarders still suffering from a shortage of goods from China, which might be able to adapt some of their know-how and equipment to ensure supply lines in this country stay open, even in the face of looming curfews and possible lock-downs? (And shortages of medication and medical equipment, a lot of which comes from China).
We also think Utah Republican Sen. Mitt Romney’s idea of quickly giving every American $1,000 is great. Not because anyone can live on $1,000 for a long time, but because put in the hands of individual American consumers, it would likely be spent and not wasted. Unlike the piles of cash big corporations and financial institutions may be sitting on, but are too afraid to do anything with other than sit on it. Or may get from the government and may spend unwisely in a way that does not most directly benefit employees. The pushback on Romney’s idea is mostly along the lines that a lot of people don’t need $1,000, and a lot of people need a lot more than $1,000.
But you know what? Instead of sitting around talking about it, get that money out there and give people the opportunity to use it to take care of each other and do right by each other. We’re already seeing some truly remarkable individual efforts in a lot of situations: like this doctor in Michigan who’s figured out a way–maybe–to provide ventilation for 4 patients off a single ventilator. She admits it hasn’t been tested, but says it’s been done in Las Vegas following the mass shooting there several years ago. This kind of ingenuity is just remarkable, and cannot be legislated.
Trump’s preferred response of a reduction in payroll taxes (which he wanted to do anyway, long before the Coronavirus was on the horizon), is not such a great solution: because it doesn’t help people who lose their jobs and thus are not on a payroll. And it doesn’t help many service employees who are paid mostly in tips.
And one thing we need to always remember in all of this, the U.S. is already running a record budget deficit. So all this emergency money will just be added to that, and make it a lot worse. But it has to be done. What didn’t have to be done is the $1.5-trillion tax cut Trump and Republicans giddily pushed through when the economy was booming. Regardless of what happens in the coming weeks and months, we—and our children, grandchildren, etc.—will be paying for that for years and decades. Had the U.S. come into this situation with a budget surplus, which it could’ve, given how robust the economy was at the time the tax cut was passed, a lot of what has to happen now could’ve been done with fewer inevitable dire economic consequences down the road.
Yeah, that’s water under the bridge now. But also–to paraphrase the eloquent words of one of our readers who sent us a note today–it all adds up to: “money blowing over a waterfall to depths we cannot fathom”.