The Federal Reserve must reduce long-term damage from coronavirus

Reviving crisis-era programmes is a first step but the central bank may need to buy corporate bonds

Ben Bernanke and Janet Yellen

© FT montage; Bloomberg

Around the world, policymakers are grappling with the effects of the devastating coronavirus.

Experts on public health are taking the leading role, as they should. For their part, fiscal policymakers are helping to fund the public health response while providing critical aid to people whose lives and livelihoods have been shattered by the virus and its effects. Fiscal policy will certainly have to do more as the size of the hit to economic activity becomes apparent.

Central banks, like the US Federal Reserve, also have a useful role to play. Some of the actions recently announced by the Fed, including cutting the short-term policy rate nearly to zero and preparing to buy at least $700bn in Treasury debt and mortgage-backed securities, are superficially similar to those taken by monetary policymakers during the 2008 financial crisis.

However, the underlying challenges today are quite different. Back then, the near-collapse of the financial system froze credit and spending; the goal of monetary policy was to restart both.

Now, the problem is not originating from financial markets: they are only reflecting underlying concerns about the potential damage caused by the coronavirus pandemic, which of course monetary policy cannot influence.

In the near term, public health objectives necessitate people staying home from shopping and work, especially if they are sick or at risk. So production and spending must inevitably decline for a time.

So what are the Fed’s objectives today? Its recent actions have been aimed at stabilising financial markets, which have been highly volatile and have not functioned normally.

Communications difficulties among teleworking or siloed traders and selling from leveraged traders who are having to post additional cash to meet margin calls as share prices fall may have contributed to the market’s illiquidity.

The most important financial markets, including those for US Treasury debt and mortgage-backed securities, must work properly if lenders are to feel confident about extending credit to households and businesses in such unusual times.

However, the Fed and other policymakers face an even bigger challenge. They must ensure that the economic damage from the pandemic is not long-lasting. Ideally, when the effects of the virus pass, people will go back to work, to school, to the shops, and the economy will return to normal. In that scenario, the recession may be deep, but at least it will have been short.

But that isn’t the only possible scenario: if critical economic relationships are disrupted by months of low activity, the economy may take a very long time to recover. Otherwise healthy businesses might have to shut down due to several months of low revenues. Once they have declared bankruptcy, re-establishing credit and returning to normal operations may not be easy.

If a financially strapped firm lays off — or declines to hire — workers, it will lose the experienced employees needed to resume normal business. Or a family temporarily without income might default on its mortgage, losing its home.

To avoid permanent damage from the virus-induced downturn, it is important to ensure that credit is available for otherwise sound borrowers who face a temporary period of low income or revenues. One of the Fed’s principal goals is to ensure that credit is available. It has strongly encouraged banks to work with borrowers suffering from temporary income losses, and it has lowered the interest rate it charges to banks who borrow from the Fed’s discount window.

The Fed’s purchases of mortgage securities should lower mortgage rates and make it easier to obtain or refinance a mortgage. Congress is also looking at providing targeted help to households, firms and industries most severely hit by the economic effects of the virus.

However, there is more that the central bank should consider doing as it helps Congress reduce the long-run effects of the downturn.

First, although the Fed has made the terms of its discount window more attractive, banks have historically been reluctant to use the discount window as a source of funding. They often fear that the markets will infer that if a lender has to use the discount window it must be financially weak. During the financial crisis, the Fed solved that problem by supplementing the discount window with a programme called the Term Auction Facility, which auctioned funds to banks.

For various reasons, banks were much more willing to use the TAF, and it was accordingly more successful at providing them with the funds they needed to make loans.

There are other tools the Fed could use to get funds into the credit stream, such as a facility (technically known as a repo facility) that could provide cash to a wider range of lenders than the discount window, against various forms of collateral. The Fed’s announcement that it will revive the Primary Dealer Credit Facility, set up in 2008 to help dealers finance their holdings of credit, is an important supplement to these efforts.

The Fed could also explore a low-cost financing facility for banks to support lending to households and small businesses adversely affected by the crisis. A facility, similar to the Bank of England’s Funding for Lending Scheme, could spur the provision of credit to these borrowers. Funding for lending programmes have been successful in a number of other major economies at increasing the availability of credit to bank-dependent borrowers.

The Fed, with the support of Treasury and the Congress, could also restart the Term Asset-Backed Lending Facility — a programme that succeeded during the 2008 crisis in expanding credit to many households and businesses. This facility could support the issuance of asset-backed securities collateralised by loans to businesses and consumers affected by the crisis.

Beyond ensuring that lenders have adequate liquidity, the Fed has already taken an important step toward unfreezing corporate credit markets. In 2008, the commercial paper market — through which corporations get essential short-term funding — effectively froze up, putting many companies under critical pressure.

The Fed created a programme called the Commercial Paper Funding Facility, through which the Fed made short-term loans directly to qualifying firms. The Fed is reinstituting this programme, which was highly successful during the crisis, not only in ensuring the flow of short-term credit but in unfreezing the market and bringing back private lenders. It also made no losses and earned a profit for taxpayers.

Finally, as Eric Rosengren, president of the Federal Reserve Bank of Boston recently suggested, the Fed could ask Congress for the authority to buy limited amounts of investment-grade corporate debt. Most central banks already have this power, and the European Central Bank and the Bank of England regularly use it.

The Fed’s intervention could help restart that part of the corporate debt market, which is under significant stress. Such a programme would have to be carefully calibrated to minimise the credit risk taken by the Fed while still providing needed liquidity to an essential market.

Central bank tools cannot eliminate the direct costs of the virus, including the suffering and loss it will create. However, the Fed can help mitigate the economic effects of the outbreak, particularly by assuring that, once the virus’s direct effects are controlled, the economy can rebound quickly.

The writers have each previously served as chair of the US Federal Reserve.

Huge fiscal spending is needed to fight the coronavirus downturn

Far more is required than during the global financial crisis

Martin Sandbu

Picture shows the Villamuriel Renault factory in Villamuriel, Palencia, after its closure in light of the novel coronavirus, COVID-19, outbreak on March 16, 2020. - European automakers began shutting down factories today as governments impose confinement and other measures to curtail the coronavirus outbreak, which is expected to take a heavy toll on national economies. (Photo by Cesar MANSO / AFP) (Photo by CESAR MANSO/AFP via Getty Images)
Locked gates at a Renault plant in Spain. While the coronavirus constitutes a temporary supply shock, the demand repercussions will make the recession deeper and longer © Cesar Manso/AFP/Getty

As the enormity of Covid-19’s probable economic fallout dawns, governments should prepare themselves for equally yawning gaps in public finances. That should not be a cause for alarm.

On the contrary, unless government deficits widen to a scale unprecedented even in the global financial crisis then policy may well be seen to have failed to do its job.

Between 2008 and 2010 the public debt of the Group of 7 large economies rose by 10 to 25 percentage points as a share of gross domestic product. Government deficits worsened by four to 10 percentage points.

Most of that was because of the collapse in GDP, which reduced tax revenues and increased spending on things such as unemployment benefits — the “automatic stabilisers” of government budgets in action. A smaller part was due to the discretionary fiscal stimulus packages deployed in 2009.

It now looks like the current downturn will be at least as deep as that caused by the global financial crisis. Economists think Chinese GDP fell by 13 per cent in the first two months of the year.

Dramatic contractions are likely in the US and European economies too, with cross-border travel all but shut down and much retail, service and manufacturing activity reduced by isolation and social-distancing measures.

As economics professor Pierre-Olivier Gourinchas points out, if the measures to contain the virus reduce economic activity to half its normal level for just one month, and then to three-quarters for two more months, year-on-year growth will come in at about minus 10 per cent.

If the downturn this year is deeper than in 2008-9, we should expect bigger government deficits than then. But even that will not be enough.

The discretionary fiscal stimulus needed today is much bigger than the 1.5 per cent of GDP delivered in the EU a decade ago.

That is because the right fiscal response today, beyond obviously spending as much on health measures as needed, is to sustain the income that people had expected to receive were it not for the virus. While the disease and the containment measures constitute a temporary (we hope) supply shock, the demand repercussions will make the recession deeper and longer.

Disappearing orders, jobs and pay cheques — and the uncertainty that this creates — make people curtail their purchases by far more than the direct effect of the disruption.

That is why it is a mistake to argue that a big demand stimulus cannot do any good because demand is constrained by disrupted supplies and people’s constrained ability to spend if they are self-isolating.

The point of a fiscal programme, scaled to sustain everyone’s income through the downturn, is to ensure that demand falls no further than this. The dramatic slide in inflation expectations suggests that markets expect demand to contract much more than is necessary.

What do naysayers think are the risks of a massive fiscal transfer programme? Is it that people do not spend it because they are physically unable to? At least they will not cut back because they are afraid for their futures, which is what can cause harmful downward spirals in demand.

Or is it that the additional debt is unsustainable? Yet central banks have ensured that ultra-low interest rates can be locked in for the long term.

Or is it that they do try to spend it, but because of supply shutdowns this causes an inflationary spike? Yet that would be a sign of success: it would prove that a deeper demand contraction has been contained.

As soon as capacity is back on stream, increased production will bring inflation down. There may even be an added bonus if pent-up demand creates pressure for greater production and productivity improvements, just when people may be eager to get back to work and make up for lost time.

The upshot of all this is twofold.

First, governments should throw caution to the wind and spend massively. Luis Garicano, an economics professor and EU parliamentarian, proposes a programme of €500bn, or some 4 per cent of EU GDP.

Even that may be too modest. Prof Gourinchas suggests the size of the fiscal stimulus should be as big as the drop in GDP. If governments end the year with budget deficits in the single digits, they will most probably have done too little.

Second, speed is of the essence when the goal is to reassure people they will not be poorer. This puts on the table policy ideas that just yesterday seemed radical. Universal transfers to all Americans are being discussed seriously in the US (following Hong Kong’s example) as the quickest way to achieve traction on the real economy.

The push by many economists to sustain incomes, regardless of the supply contraction and possible inflation, amounts to a tacit endorsement of targeting nominal GDP.

As for the eurozone, mutualising some of the new debt to ensure that flighty bond markets do not derail government spending to combat the virus has become conceivable, whether that is through common bonds or central bank money.

The containment of the virus is already turning our everyday life upside down.

The necessary fiscal remedy may well do the same to many received economic ideas.

The AI doctor will see you now

Medicine is at the point computer-driven financial trading was in the early 2000s

Brooke Masters

web_Health and AI monitoring,
© Ingram Pinn

If artificial intelligence in healthcare brings to mind visions of robot surgeons, BioIntellisense’s stick-on sensor is bound to be a disappointment. Just 3 inches wide by 1 inch tall, this plastic and metal double hexagon was cleared last month by the US Food and Drug Administration for remote monitoring of vital signs with medical-grade accuracy.

Doctors at UCHealth, which runs 12 Colorado hospitals, say the device will let them send patients home earlier while still monitoring their respiratory rate, resting heart rate, skin temperature and even body position. The data can then be fed into computers that use machine learning to spot people who might need more attention, allowing early intervention and avoiding emergency hospital visits.

UCHealth has already used computer surveillance to fight sepsis, a potentially fatal complication from infection, on its wards. In its first six months, that tracking system reduced the time from recognition of sepsis to treatment by two hours and cut mortality by 30 per cent.

Such uses will also save money and staff time, says Richard Zane, UCHealth’s chief innovation officer. “Now, instead of one nurse monitoring eight people on a ward, she can monitor 8,000 people at home.”

At a time when insurers and public and private healthcare systems alike are struggling to contain costs, the attraction of artificial intelligence is strong. Some 367 healthcare AI start-ups received $4bn in funding last year, according to CB Insights. Investors are plunging into everything from sophisticated scheduling programmes that maximise the use of operating rooms to prediction systems that read mammograms or help gastroenterologists decide in real time whether to remove a polyp during a colonoscopy. The consultancy Accenture predicts that machine learning will create $150bn in annual healthcare savings in the US alone by 2026.

Many individual physicians have long been sceptical that machines can replace the personal touch. But attitudes are shifting. An American Medical Association survey last year found that 36 per cent of doctors believe digital health tools — particularly telemedicine and remote monitoring — definitely boost their ability to care for patients, up from 31 per cent in 2016.

In some ways, healthcare is now at the point where computer-driven financial trading was in the early 2000s. Back in 2005, computer-driven hedge funds, which use algorithms to follow market trends, managed less than $50bn in assets. By 2014, that had ballooned to $270bn, according to HFR data. Traders lost their jobs all over Wall Street and the City of London as strategies that relied on computers to spot opportunities and place rapid-fire trades — including high-frequency trading — exploded. By 2009, HFT accounted for 60 per cent of daily US equity trading, and it remains above half.

Experts in healthcare technology argue that the use of AI and machine learning will move much more slowly because of the need to secure regulatory approval and the dire consequences of getting decisions wrong.

When trading computers make mistakes — or contribute to panic — the trades can be reversed. Indeed, that’s what happened in the 2010 flash crash, when the Dow Jones Industrial Average dropped 9 per cent in minutes and bounced back up again. Wrong calls on healthcare are a very different matter, and many medical decisions involve choosing between imperfect options.

In some ways, the challenges ahead for AI in medicine are more like those faced by Uber, Waymo and the other designers of driverless cars. Machines are great at monitoring and handling straightforward situations — like driving down an uncrowded highway. But city streets and traffic jams are completely different. And designing the algorithms is only the first step. Winning public trust will be far harder, especially after the 2018 crash in which an Uber vehicle killed a pedestrian while its back-up safety driver was streaming a television show on her phone.

When it comes to medicine, most AI experts say that we are decades away from eliminating the need for doctors and nurses entirely. Success will come more quickly for applications that build in the human touch. These use AI to identify the most complicated situations and pass them on to doctors and nurses who are ready to handle them.

“Our strategy is to enable the frontal cortex of doctors rather than lobotomising them,” says Bill Evans, managing director of Rock Health venture fund.

The fund was a seed investor in Virta Health, which uses constant monitoring and AI to track and treat patients with type 2 diabetes. The computer alerts (human) health coaches and doctors when the data suggest patients need a nudge or a dosage change.

An early clinical study found that more than 60 per cent of patients reversed their symptoms.

The company is so confident that customers, including Blue Shield of California and US Foods, only pay if the aggregate patient results hit performance targets.

If pay for results spreads, the outcome could be even more revolutionary — and possibly frightening — than a robot surgeon.

Are Independent Central Banks Passé?

The fear among monetary policymakers that governments will reassert control over interest rates is exaggerated. Instead of bemoaning the surge of comment and challenge, central banks need to raise their game, enhance their transparency, and get better at explaining and justifying their actions and decisions.

Howard Davies

davies67_Drew AngererGetty Images_trumpjeromepowell

LONDON – US President Donald Trump’s decision to nominate economist Judy Shelton for one of the vacant positions on the Federal Reserve Board has put the future of central bank independence back on the agenda. Shelton has cast doubt on the desirability of, and legal basis for, Fed independence, saying last year, “I don’t see any reference to independence in the legislation that has defined the role of the Federal Reserve.”

And she has argued for “a more coordinated relationship with both Congress and the President.” If Fed policy were “coordinated” with Trump, then it is fairly clear who would be calling the shots.

Of course, one new Fed governor could not upturn decades of practice. But there are suggestions that if appointed, Shelton might replace Jay Powell when his term comes up for renewal in 2022, leaving a fox in charge of the chicken coop.

It is not only in the US that central-bank independence is under threat. In Turkey, President Recep Tayyip Erdoğan fired his governor last year, saying that “we told him several times to cut interest rates,” but he did not oblige.

In India, the government asked the Reserve Bank to hand over some of its reserves, and Governor Urjit Patel resigned “for personal reasons,” and his key deputy followed soon after with a broadside directed at Prime Minister Narendra Modi’s administration: “governments that do not respect central bank independence will sooner or later incur the wrath of the financial markets.”

Central banks around the world are worried by these straws in the wind. Otmar Issing, the first chief economist of the European Central Bank, has written of the “the uncertain future of central bank independence.” The ECB’s then-president, Mario Draghi, was moved to issue a firm defense of the concept before he left his post.

The Bank for International Settlements has noted “the extraordinary burden placed on central banking since the [2008 global financial] crisis,” and warned that central banks cannot deliver on the expectations people have. Joachim Fels of Pimco has concluded that “the heyday of central bank independence now lies behind us.”

Are these prophets of doom correct? Will we soon see control of interest rates back in the self-interested hands of finance ministries? In the words of the song, was central bank independence just a silly phase we were going through?

I think not. The most recent global survey, by the economists Nergiz Dincer and Barry Eichengreen, though admittedly conducted in 2014, shows that there is still a “steady movement in the direction of greater transparency and independence over time (and) little indication these trends are being rethought.”

One might have some grounds for skepticism about the measures of independence they use – according to their model, Kyrgyzstan boasts the world’s most independent central bank – but they can find no cases where changes to legislation bringing the central bank back under political control have been implemented.

In the West, while Trump has huffed and puffed, he appointed Powell, a man with conventional instincts and a backbone. British Prime Minister Boris Johnson resisted the temptation to appoint a Brexit supporter to the Bank of England and named a veteran BOE insider, Andrew Bailey, who has independence in his bones. In the eurozone, a similarly neutral choice emerged as Draghi’s successor, and a change in the ECB’s status would require a new European Union treaty.

The chances of that are vanishingly small. EU leaders show no indication of taking the risk of opening up the constitution to further referenda, as would be necessary in some countries.

Furthermore, some of the political pressure for action has diminished. Trust in the ECB fell sharply after the eurozone crisis nearly a decade ago, but has recovered in most countries in the last couple of years. Even in Greece, the ECB is trusted more than the national government.

There has, it is true, been a change in political rhetoric. After a long period in which governments resisted any commentary on interest-rate decisions, some have now become more vocal. Jacob Rees-Mogg, the Conservative leader in the House of Commons, dubbed Mark Carney, the outgoing BOE governor, a “second-tier Canadian politician” who failed to get a job at home, after Carney disagreed with Rees-Mogg’s economic judgment on the costs of Brexit. And Trump has characteristically weighed in with tweeted criticism of the Fed.

Should central banks regard this renewed disputatiousness as a bad and dangerous thing? They may, if they wish, but I suspect they are pushing water uphill. We have moved into a less respectful age, which is not surprising, given the mistakes made by central banks (and others) in the run-up to the 2008 crisis.

Instead of bemoaning the surge of comment and challenge, central banks need to raise their game, enhance their transparency, and get better at explaining and justifying their actions and decisions.

Andy Haldane, the BOE’s chief economist, has shown that much of what central bankers say is incomprehensible to all but a small proportion of the population. Only 2% of the population can readily understand the minutes of the Fed’s Open Market Committee, which sets interest rates, while 70% can understand a Trump campaign speech.

That gap needs to be closed, and central banks should make their work more accessible to the public. Maybe a collective trip to Kyrgyzstan is in order to observe best practice in action.

Howard Davies, the first chairman of the United Kingdom’s Financial Services Authority (1997-2003), is Chairman of the Royal Bank of Scotland. He was Director of the London School of Economics (2003-11) and served as Deputy Governor of the Bank of England and Director-General of the Confederation of British Industry.

The Canadian Geopolitical Dynamic

By: George Friedman

Canada is being wracked by what appears to be a moderately important internal crisis over First Nations’ objections to the construction of a natural gas pipeline in British Columbia. This crisis gives me a chance to write about the geopolitics of North America, with particular focus on Canada. Normally, we would not need to address such problems because Canada is generally a country in which conflict is contained in a predictable framework.

At the moment, the conflict remains within that framework, but it is not impossible that it will break out. That would affect the United States, and things that effect the United States frequently wind up in a different framework in a place far away.

Since I doubt the U.S. has any plans to occupy Canada (actually, I can’t be sure), and most of the security issues involving the U.S. and Canada revolve around scheduling joint training, I regard Canada’s problems as internally manageable. Still, there is value in using this as an opportunity to consider the Canadian dynamic.

Center of Gravity

According to our model, the center of gravity of the global system shifted after the fall of the Soviet Union to North America. Note that I said North America rather than the United States because, as in Europe over the course of centuries, the leading nation on the continent can vary.

The United States is enormously powerful, but it shares the continent with two other significant powers: Mexico and Canada. All three countries share a single characteristic: They are continental powers that have access to both the Atlantic and Pacific. It is this geographical reality that makes the dominant North American nation the center of gravity. Asia does not have ready access to the Atlantic, nor does Europe have ready access to the Pacific. North America has access to both.

Neither Canada nor Mexico is in a position to challenge American dominance today. But it is their long-term potential that makes them important. Mexico exists in a condition we might call stable instability. It faces drug cartels and regional disputes, but it has faced such things for a long time and has developed processes for living with them. An instability that exists for decades has its own way of creating a certain type of stability.

Of the three major countries in North America, the one that has been least interesting from a geopolitical standpoint has been Canada. It has not had stable instabilities, or ambitions to expand, or fears of subjugation. It had some internal problems, but, with some very limited exceptions, those problems were settled without crisis.

Canada was a country that could contain itself, in some ways more like a Nordic country that has learned to live well in spite of being close to where wolves may come from. For the Nordic countries, the wolves came from the European Peninsula. For Canada, the wolves that could threaten the homeland would come from the United States.

The stability of Canada was the guarantee of American disinterest on which its national security rested. If it got involved in war, that was its choice. Canada was in Afghanistan. It refused to be in Iraq. It fought alongside the U.K. in the two World Wars of the 20th century but was never itself threatened, nor was it ever the country doing the threatening.

We are therefore at a moment when Canada might dramatically change, and in unexpected ways. Canada is a vast country, with few people and many competing interests. The Maritime Provinces still take their bearings from the first settlers: the English and the Scots. Newfoundland was a British colony until after World War II.

This region is the poorest part of Canada outside the Arctic regions and the most isolated. Then, there is Quebec, a province that had been settled by the French, then defeated by the English, leaving behind an entity that was French, hostile to the English and the greatest threat to Canadian stability.

Ontario is the anchor of the Canadian federation; it is English but now filled with immigrants. To the west, Alberta and Saskatchewan are in a historical sense one vast province that more resembles the America south of their borders than the provinces to the east or to the west, although British Columbia’s culture resembles that of the American West Coast.

The Pipeline Dispute

This would seem to be a prescription for conflict, but to this point (save for Quebec) the worst there has been is mutual irritation, which is healthy in all countries.

But Canada is now facing two problems, rooted in diverging ideologies and interests. Ottawa has tended over recent years to adopt ideologies that have troubled some parts of Canada. For example, there are boards that review speeches or writings that search for hate speech and penalize those who committed it. They have raised the question of whether differing views on immigration, multiculturalism and indigenous rights are legal.

There are also differences of opinion on global warming and the role of hydrocarbons. There are then rules on the rights of indigenous people, officially called First Nations, combining a sense of guilt with the obligation to make restitution.

Canada is multicultural, which means that many Canadians adopt differing views on these subjects.

In general, nowhere is this feeling more deeply held than in Alberta, whose central industry is oil production, and whose ability to transport oil to China, for example, has been blocked by British Columbia. This is also a province whose culture is similar to the American non-Pacific West. They resent the language boards deeply and feel that compensation to the First Nations is out of hand.

The current crisis has to do with an interesting evolution in the First Nations issue.

Protesters who oppose the construction of the Coastal GasLink pipeline, which runs across land in British Columbia to which the Wet'suwet'en First Nation has historical claims, have blocked railways and other transport links. Alberta is of course outraged. But joining it in its outrage is Quebec, which is running short of propane it needs for heating and is demanding that Ottawa do something to end the blockade.

Thus we now have two provinces confronting what they regard as a blatant disregard for their most pressing interests. Both provinces (and Saskatchewan as well) have expressed common interest in this issue, and both are being torn by economic issues that are fundamental to them. From their points of view, there is a sense that their interests would be better served outside Canada even if for different reasons. Quebec came close to secession in the 1990s but was contained. But the sensibility of secession is still there.

Alberta, meanwhile, has been bitter about Canada’s equalization program, which transfers money to provinces with weaker economies (including Quebec). What truly enrages Alberta is that Quebec uses the money for what is seen as lavish social services, such as cheap day care, and then criticizes other provinces, like Alberta, for their more meager services. It’s like Thanksgiving dinner, with all the in-laws, all the bad memories and very loud voices.

But this time, it is serious. Alberta can’t withstand the status quo. Its oil interests are fundamental to both its economy and its identity. Ottawa's valuing First Nations claims over Quebec’s need for fuel demonstrates, according to people in Quebec, the reason secession was a good idea. And Ottawa, in trying to placate interests in Ontario and British Columbia for which these values are central, is incapable of crossing the chasm.

At the moment, Quebec can’t secede. Its economic situation is poor, and France will not subsidize it as Charles de Gaulle once promised. When I was last in Alberta, I got the sense that the talk of secession was simply letting off steam. At this point I am not sure. In being inflexibly hostile, those opposing the use of hydrocarbons are limiting Alberta’s well-being. The most dangerous are those competing interests that encompass economic and ideological interests.

Support for Secession

Geography and temperament limit an alliance between Quebec and Alberta. But Albertans talk fondly about joining the U.S. That is far from unthinkable, but it challenges another American interest, which is that its northern frontier be quiet and secure. Quebec used to alarm the U.S., because it could not predict Quebec’s foreign policy and because the alliances it might make could be dangerous.

It has been a long time since the U.S. worried about this. At the same time, if Alberta seceded, there is some chance Quebec separatism might revive, and that would resurrect old questions.

The U.S. encouraging Alberta, therefore, would at least destabilize Washington’s relationship with Ottawa and joint projects like NORAD. At most, it would create an unpredictable nation on the New York border. It would also isolate to a great extent the Maritime Provinces, which are strategically important to U.S. control of the Atlantic and for whose security the U.S. might have to pick up the bill.

We are far down the road now, but not so far as to be preposterous. Contrary to what some in Canada have said to me, the U.S. does not want to destabilize Canada. Alberta and the U.S. have much in common, but Alberta’s secession would create a geographical nightmare in Canada, potentially blocking access to British Columbia.

My point in addressing secession is to point out that it is unlikely. Not being Canadian, it is not my place to offer advice on internal matters, but given that Canadians never tire of the sport of advising Americans, I will simply point out that confederation requires balance.

The balance may not rest in the demographic status of regions, but in balancing the interests of all parties, which means moderation on core values.

Major League Soccer plays the long game

David Beckham and fellow club owners keep investing despite losses as 25th American season starts

Murad Ahmed in New York

David Beckham, co-owner of Inter Miami CF, which will make its debut when the new MLS season kicks off © FT montage

When David Tepper bought a Major League Soccer franchise for $325m in December, the hedge fund billionaire agreed a price similar to one needed to acquire football clubs in the sport’s financial stronghold of Europe.

Yet, frothy valuations for sides in the US and Canada’s top tier for football — or soccer, as it is known in North America — have been achieved despite most MLS teams failing to turn a profit since the competition kicked off 25 years ago.

“The concept of profitability is one that will come when we’re able to . . . to see the results of all the investments that we’ve been making over the last 20 years,” said Don Garber, MLS commissioner. “Our owners have no doubt that’s coming.”

The privately held league reveals few financial details, but Mr Garber said most franchise owners were in “deep investment mode”, such as building stadiums, and were willing to sustain losses as the league grew.

The line that current spending will lead to future returns appears to be working. The competition is set to expand from the 24 teams that featured last season to 30 by 2022.

Among them is Inter Miami CF, which makes its debut when the MLS season begins this weekend. The new club is owned by former England captain David Beckham and a group of investors that includes Masayoshi Son and Marcelo Claure, the top two executives at Japanese investment group SoftBank.

Mr Beckham paid a cut price for his franchise, triggering an option to acquire an MLS team for $25m as part of his 2007 transfer from Spain’s Real Madrid to Los Angeles Galaxy — a move that raised global interest in the league.

Nov 10, 2019; Seattle, WA, USA; Seattle Sounders FC fans celebrate after beating Toronto FC during the MLS Cup at CenturyLink Field. Mandatory Credit: Jennifer Buchanan-USA TODAY Sports - 13667256
Seattle Sounders FC fans celebrate after beating Toronto FC during the MLS Cup © USA TODAY Sports

Since then, team values have spiralled. In 2013, City Football Group, the Abu Dhabi-controlled parent company of England’s Manchester City, paid $110m for a New York-based franchise.

Last year, former Hewlett-Packard and eBay chief executive Meg Whitman paid $100m for a 20 per cent stake in FC Cincinnati, valuing the club at $500m.

While these prices are similar to those paid for teams within Europe’s “Big Five” leagues — England, Spain, Germany Italy, France — those divisions benefit from multibillion broadcasting contracts unmatched elsewhere.

A consortium led by US billionaire Daniel Friedkin is in late-stage talks to acquire Italy’s AS Roma for €750m ($803m), while an investment group backed by Saudi Arabia’s sovereign wealth fund has offered £350m ($448m) to acquire Newcastle United in England.

But these rival European leagues are significantly higher in quality and offer better wages to entice the best players. US television ratings for the English Premier League matches consistently beat those for MLS games.

Since 2000, no MLS side has even won the North American version of the Champions League, a continental club competition that has been dominated by sides from Mexico’s Liga MX.

Analysts say the unique structure of MLS helps explain the rising valuations of its teams.

Whereas most leagues have promotion and relegation, with the worst-performing teams dropping out of the top division, MLS is open only to new entrants willing to pay “expansion fees”, which are then shared between existing owners.

Other arrangements more familiar to US domestic sports leagues, such as salary caps on players, also help to keep costs down.

“You have scarcity because the number of franchises is tightly controlled,” said Dan Jones, head of the sports business group at Deloitte. “The sealed league system and collective bargaining agreements [with players] help to avoid volatility in revenues for investors.”

Mr Tepper was convinced to pay $325m for his new franchise in Charlotte, North Carolina, partly because it would become the 30th side in MLS. Mr Garber said the competition would not grow beyond this number of teams for the foreseeable future.

Aug 25, 2018; San Jose, CA, USA; San Jose Earthquakes goalkeeper Andrew Tarbell (28) dives but is unable to make a save as the Vancouver Whitecaps score a goal during the second half at Avaya Stadium. Mandatory Credit: Kelley L Cox-USA TODAY Sports TPX IMAGES OF THE DAY - RC1729DE9730
The San Jose Earthquakes in action against the Vancouver Whitecaps © USA TODAY Sports

“Beyond the dilution impact of adding more owners at a time when our revenues are still growing slowly, the real issue is we have six new teams coming on in the next number of years and we need to be very thoughtful about onboarding all those teams,” said Mr Garber.

Franchise owners also benefit from an equal share in Soccer United Marketing, a profitable organisation that owns rights to MLS broadcasting, sponsorship and merchandising.

SUM also has the commercial rights to football across North America, such as matches held by US Soccer, the governing body behind the men’s and women’s national teams. Mr Garber is also chief executive of SUM and said “almost half” of its revenues were “non-MLS related”, without providing further details.

While this business model has not led to team profits, Mr Garber insisted the league had come a long way since it almost ceased operation due to financial difficulties in 2001.

With the football World Cup set to be played across North America in 2026, he said investors were betting that the sport would eventually gain the same popularity in the US and Canada as it had across the world.

“The rationale [behind the prices paid for MLS franchises is] soccer is a sport on the rise in North America,” he said. “MLS is driving an enormous amount of energy and momentum and value for fans, communities, players and investors because we have so much growth in our future.”