Officials have created a safety net for the international financial system, but don’t have the same tools to quickly cushion the economy
By Jon Sindreu
Treasury Secretary Steven Mnuchin spent the weekend negotiating over the U.S. fiscal response to the crisis. / Photo: mary calvert/Reuters .
The Covid-19 crisis has driven Western nations to embrace government spending after a decade in which monetary policy has proven powerless to boost economic growth. Investors’ focus should be on whether fiscal policy can match one of central banks’ best attributes: speed.
Last week, the U.K. announced a fiscal response that is expected to initially amount to more than 10% of gross domestic product. But size may not be all that matters.
As the lengthy debate taking place in the U.S. Congress right now showcases, fiscal policy is more politically contentious and harder to focus than cutting interest rates.
Yet the clock is ticking to prevent a vast number of small and medium enterprises from severing their relationships with workers and suppliers—actions that would almost certainly prolong the impending recession.
Britain’s proposals are encouraging. Among other measures, the government will give grants to companies covering 80% of the wages of workers at risk of being dismissed. The key is that, although initially projected to last three months, they could automatically extend for as long as it takes for the current coronavirus paralysis to lift.
Officials may want to take a page out of central banks’ playbook after all.
Despite the modern—flawed—idea of monetary policy as controlling growth and inflation, its two main jobs have always been different: to ensure a stable market for government debt and to prevent liquidity crunches.
The Bank of England was created in 1694 to finance Britain’s war against France, and in the 19th century started to become a “lender of last resort,” lending freely to cash-strapped banks at a cost. In 2008, it became apparent that simply backing banks wasn’t enough in an era in which globalized finance happens through insurers investing in money-market funds that purchase securities intermediated by market makers—transactions often done overseas with the U.S. dollar as the ultimate settlement currency.
The Fed learned then that, to do the same old job, it had to open facilities to lend dollars to all corners of this complex system. It is now doing that again.
And it is working. Despite the vast number of dislocations in equity and debt markets caused by business and investor responses to the coronavirus, the world’s financial plumbing seems to be coping.
Indicators of worrying dollar scarcity overseas suddenly corrected after the Fed announced Friday that it would provide dollars on a daily basis to foreign central banks. The Fed has also managed to rein in disruptions in the Treasury market, which is crucial to allow for any fiscal stimulus.
There are many lessons fiscal policy makers can learn from central banks’ success.
One is that providing an “income of last resort” to firms, freely and without limit but under strict conditions—as the U.K. seems to be doing—may be much more effective than a more generous but limited cash injection, because authorities can never predict the size or length of a crisis, or determine who really deserves the funds.
Another is about speed and simplicity. Budget deficits already tend to balloon during recessions regardless of governments’ decisions, because tax receipts fall and unemployment benefits surge—the so-called automatic stabilizers.
There should be more of them. U.S. proposals to send checks to every citizen are an excellent first line of defense, but they are designed to be exceptions. Instead, such payouts should be triggered automatically in emergencies, rather than through congressional approval.
For all of its ills, the global financial crisis did force central bankers to create a robust safety net for financial markets. Investors should now welcome any measures that do the same for the economy.
0 comments:
Publicar un comentario