March 19, 2020 at 5:00 am ET
The coronavirus health crisis has already become an economic and financial crisis, which, if not handled properly, will evolve into a human, social and political catastrophe. There isn’t much time to act.
The federal government’s current recommendations limiting gatherings are going to get more extreme quickly. The U.S. will soon be in a de facto national quarantine with virtually everyone sheltering in place. Almost all commercial activity will grind to a halt, probable for months and possibly through the end of the year. Corporate revenue and income will evaporate as the production, sale and purchase of many goods and services screeches to a halt. Businesses and banks are going to fail at historic levels.
This unprecedented synchronized global economic shutdown threatens nearly 80 million jobs in the U.S., which will be an unemployment rate above 50 percent. Given most Americans live paycheck-to-paycheck and have no savings to fall back on, there is going to be a human disaster as soon as the first paycheck is missed, which has already happened for some workers.
While the actions by the Federal Reserve will be helpful to the financial system, they will not address any of those crushing economic circumstances. That’s because this is not a bank-centered financial crash, but an economic crisis due to a supply and demand collapse.
In 2008, Congress and the president quickly passed a $700 billion TARP bailout for Wall Street and financial regulators used as much as $29 trillion to effectively nationalize the global financial system. Today, they must pass a multi-trillion bailout package for Main Street, to be spent as follows.
First, the basic needs of laid off Americans have to be met. While payments of $1,000-$5,000 will help and should be done, that’s woefully inadequate. That’s why any federal assistance to any company must be conditioned on that company paying all employees’ net wages (plus tips) during the crisis (i.e., no layoffs, RIFs, etc.). The government would then reimburse all companies for those costs. For those employed, that will be the quickest way to get meaningful amounts of money into the hands of more than 100 million Americans.
This will also help prevent bankruptcies and a financial crisis. If people receive their wages, they will be able pay their bills, including rent, mortgages, credit cards and other debts, which are now almost $14 trillion. This will in turn support landlords, other businesses and the financial industry, which would otherwise go bankrupt due to defaults and nonpayments.
Second, given the no-layoff requirement and the reimbursement for the payment of wages, it will not be necessary for employers to provide sick leave, but they will need to be required to continue (and, wherever possible, expand) employer provided health care coverage. To the extent employers expand this benefit, the federal government should require insurance companies to waive waiting periods and other threshold requirements and then reimburse employers for those costs.
Third, for those people not working, make all people impacted by the coronavirus immediately eligible for all safety net programs like unemployment insurance, food stamps and Medicaid. These so-called automatic stabilizers should be instantly expanded and fully funded. At the same time, use the schools’ systems to notify the families of the 21 million children receiving free or reduced cost meals at schools that they are eligible for those programs.
Fourth, many businesses are going to go bankrupt at historic levels as the shutdown happens. In addition to reimbursing them for continuing to pay their employees, the government is going to have to provide loan assistance to them or take equity from them for coronavirus-related losses in amounts that keep them from going bankrupt, although only at a level to survive, not replace their profits.
Any company that gets public aid via loans or in exchange for equity must also help itself by not wasting its limited cash on share buybacks or dividends, which all must be suspended for at least the duration of the crisis. Executive compensation and bonuses must also be limited to reasonable amounts. The country cannot afford the inevitable public backlash that another no-strings, unaccountable bailout as happened with Wall Street in 2008.
Fifth, many if not all state and local governments are going to quickly go bankrupt as tax receipts slow to a trickle due to the economic collapse. As a result, critical local services like police, firefighters, health care workers, water and waste systems maintenance professionals and many others will be laid off. The federal government must provide grants to replace all tax revenue lost due to the coronavirus shutdown.
Sixth, while the coronavirus crisis is nothing like the 2008 financial crash, the Federal Reserve will nonetheless need to undertake extraordinary actions to prevent the collapse of the financial system. Bank income from interest is going to collapse with zero to negative rates while lending and other traditional revenue-generating activities are going to largely stop. Plus, with more than $10 trillion in corporate debt and about $1 trillion soon to be junk, a wave of defaults, non-payments and bankruptcies are inevitable (even assuming individuals continue to pay their bills). Broad-based liquidity and other support will be necessary. However, it would be dangerously counterproductive, irresponsible and unnecessary to weaken the very financial protection rules that have made the financial system so much stronger.
Finally, unlike the 2008 Wall Street bailouts, the terms, conditions and recipients of any bailout or assistance must be clear and transparent to maintain the support of the public and the legitimacy of our political and financial institutions. Otherwise, we risk the greatest crisis of all: a loss of faith and trust in the very institutions that are needed most in this crisis.
This Main Street-focused plan will save America’s families, calm the panic and make the economic downturn as short and shallow as possible. That will also save Wall Street, the financial system and the country.
Dennis Kelleher is president of Better Markets, a non-profit, non-partisan, independent organization working to build a more secure financial system for all Americans.
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