The Fed’s Cure Risks Being Worse Than the Disease

[Midpack]

I’ve spent some time wondering how we balance saving lives with economic damage - there is a tradeoff, and we can’t just focus on one goal without considering the other. Where that balance point is, I simply don’t know how to figure it out. Here’s an article that adds to the conversation.

https://www.washingtonpost.com/busi...357a52-7023-11ea-a156-0048b62cdb51_story.html

The economic debate of the day centers on whether the cure of an economic shutdown is worse than the disease of the virus. Similarly, we need to ask if the cure of the Federal Reserve getting so deeply into corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds is worse than the disease seizing financial markets. It may be.

In just these past few weeks, the Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook. That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

• CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.
• PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.
• TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.
• SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.
• MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-size businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

 

[REWahoo]

These "saving lives vs saving the economy" discussions are great in the abstract. That all changes when someone in your family contracts Covid-19 and the discussion becomes real.

 

[Ian S]

These "saving lives vs saving the economy" discussions are great in the abstract. That all changes when someone in your family contracts Covid-19 and the discussion becomes real.

+1! Actually, we can do both i.e. save lives AND the economy. Those that complain about government spending in times like these really don't have a clue about how our economy with its fiat monetary system actually functions.

 

[Ready]

There is no good answer here. As a society we place a high value on life, so savings as many lives as we can has always been a priority. But we have never faced a situation where doing so could cause the entire country’s economic system to collapse. I don’t know what the answer is, but I know it’s not an easy decision whatever we end up doing.

 

[Dtail]

Tough decisions indeed.
A subset of the economic aspect of the decision appears to be a clear recognition of any effects on the stock market IMHO.

 

[Teacher Terry]

My kids work in casinos and are financially impacted by the closings. Yet they are glad to not be in danger working. Lives are more important than money.

 

[Beststash]

Saving lives must be the first priority. We can deal with the economy later. Not that hard of a decision for me. Unless we make saving lives a priority then no one will feel comfortable working, shopping, traveling, etc. IMO - short-term pain will equal long-term gain.

 

[MichaelB]

Multiple posts criticizing preparedness and pointing fingers have been removed. Those posts are one reason thoughtful discussion is so challenging. Please stick the thread topic.

 

[Midpack]

My kids work in casinos and are financially impacted by the closings. Yet they are glad to not be in danger working. Lives are more important than money.

Saving lives must be the first priority. We can deal with the economy later. Not that hard of a decision for me. Unless we make saving lives a priority then no one will feel comfortable working, shopping, traveling, etc. IMO - short-term pain will equal long-term gain.

+1! Actually, we can do both i.e. save lives AND the economy. Those that complain about government spending in times like these really don't have a clue about how our economy with its fiat monetary system actually functions.

You can't maximize both, that's the point. Overly simple answers, and we're going to be faced with a decision that balances one against the other.

Many millions of people out of work for a week, a month, a year, or out of a career path forever (forced career change) and businesses closed to save 100,000, 10,000 lives, 1,000 lives, 100 lives, 10 lives, 1 life? e.g. should millions stay home an extra couple of months to save 10 lives?

No matter what we do, there will be critics...

 

[Fermion]

I get that lives are more important than money, but money does save lives.

Money is what allows hospitals to keep extra stock on hand, allows drug research into cures and vaccines.

There is a point where you can actually cost more lives than you are saving when you wreck the economy but we are not there.

 

[NW-Bound]

I have lost quite a bit on the market (thought it would get to the 7-figure), and it is likely I will pay higher taxes for the years to come. However, I consider myself fortunate to be able to stay home, and not worry about not being able to pay for housing and for my meals.

I don't mind losing some of my stash via high taxes to help the workers. Without people, there's no business, no stocks, no investments.

Don't fool ourselves that we are only saving old people and people already with compromised health. People under 60 also get sick, some seriously. Fewer of them die than the geezers, but that's because they get good care at hospitals. Send them home, and many more will die. We need them to live, and to go back to work later.

It's all about "enlightened self-interest".

 

[GreenEggs]

You can't maximize both, that's the point. Overly simple answers, and we're going to be faced with a decision that balances one against the other.

Many millions of people out of work for a week, a month, a year, or out of a career path forever (forced career change) and businesses closed to save 100,000, 10,000 lives, 1,000 lives, 100 lives, 10 lives, 1 life?

No matter what we do, there will be critics...

Life is full of surprises, changes, decisions, and choices.

We can't know how many good vs bad things will come or will not come from any of this. We have seen what has happened in other countries that weren't prepared for the outbreak and we have chosen to listen to our health professionals based on the their assessment of how to best survive this.

Regardless of how bad this is in the short-term, our economy will recover and we will have learned valuable lessons from this. We will have learned how important it is to save. We will have learned how important it is to diversify. We will have learned how important it is to be prepared for unexpected events like this. We are presently being reminded of how important family, friends, and community are. We are being reminded to slow down and enjoy what we have and to be happy where we are. We are being reminded of how the Earth is one planet and that there are forces that knows no borders that can harm us all, regardless of race, religion, politics, etc.

This will end and we will bounce back.

 

[RobbieB]

I don't even try to figure stuff like this out, it just is. I don't worry about it and I don't loose sleep. I can't do anything about it so why bother?

 

[Car-Guy]

I was thinking of something similar the other day... It occurred to me that just here in the US we see more than 30,000 deaths each year in auto accidents. We don't stop driving but we try to mitigate the risk by laws, driver education, safety equipment, etc. We also see similar numbers of gun related deaths (accidents/violence/suicides) and we don't outlaw guns but we try to mitigate the risks by laws, education, etc. Trade-offs under our control.

Why do we accept those (and many other risky activities) in our lives. (rhetorical question)

Now, how do we trade off the risks of the virus and the economy?

 

[Ian S]

You can't maximize both, that's the point.

Talk about overly simplistic assertions! I don't accept your assumption. Trying to get an economy running without thoroughly containing the virus spread will be an exercise in futility as the workforce is decimated, the healthcare system collapses and companies fail due to a collapse in demand. You wind up with more deaths as well as a failed economy and severe depression i.e. the worst of both worlds. With the underlying economy fairly healthy before COVID-19 arose, if the will is there (and it is in some countries), then the solution is for all non-essential businesses to be put into a type of hibernate mode with them being paid by the government to keep their employees on the payroll while staying at home. This is sort of what they are trying to do with the temporarily juiced up UI benefits. The pandemic will pass and the virus will ultimately be controlled with vaccines and or drugs. In the meantime, we have to as much as possible save businesses and the economic structure. Only the federal government with its ability to, yes, print money is capable of doing this. There will be no serious inflation as we're already in a deflationary recession situation if not worse.

 

[Midpack]

Talk about overly simplistic assertions! I don't accept your assumption. Trying to get an economy running without thoroughly containing the virus spread will be an exercise in futility as the workforce is decimated, the healthcare system collapses and companies fail due to a collapse in demand. You wind up with more deaths as well as a failed economy and severe depression i.e. the worst of both worlds. With the underlying economy fairly healthy before COVID-19 arose, if the will is there (and it is in some countries), then the solution is for all non-essential businesses to be put into a type of hibernate mode with them being paid by the government to keep their employees on the payroll while staying at home. This is sort of what they are trying to do with the temporarily juiced up UI benefits. The pandemic will pass and the virus will ultimately be controlled with vaccines and or drugs. In the meantime, we have to as much as possible save businesses and the economic structure. Only the federal government with its ability to, yes, print money is capable of doing this. There will be no serious inflation as we're already in a deflationary recession situation if not worse.

So there are no consequences to endlessly printing money in the hopes of saving every last life? We can print money to sustain 20% of the workforce even if it takes 6 months to save that last life? This in a world where 36,000 people on average die from flu in the US each year and about the same number die in traffic accidents and almost no one bats an eye.

You said "we can do both i.e. save lives AND the economy" - there's a tradeoff as much as we don't want to face it.

 

[NW-Bound]

I was thinking of something similar the other day... It occurred to me that just here in the US we see more than 30,000 deaths each year in auto accidents. We don't stop driving but we try to mitigate the risk by laws, driver education, safety equipment, etc. We also see similar numbers of gun related deaths (accidents/violence/suicides) and we don't outlaw guns but we try to mitigate the risks by laws, education, etc. Trade-offs under our control.

Why do we accept those (and many other risky activities) in our lives. (rhetorical question)

Now, how do we trade off the risks of the virus and the economy?

Experts say if we do everything right, the death count will be 100K-200K.

If we do nothing, a lot higher, in the million.

Compared to that, auto accident deaths are peanuts.

 

[Midpack]

Experts say if we do everything right, the death count will be 100K-200K.

If we do nothing, a lot higher, in the million.

Compared to that, auto accident deaths are peanuts.

We don't know what the total fatalities will be, but I know Fauci has said 100-200K worst case if we adhere to present practices, and he's certainly a good source.

The point of this thread was about the marginal deaths after the peak, not the total number. There were over 2 million deaths (other than old age) in the USA in 2017, many not preventable but many are preventable - and most people readily accept that. Not that we shouldn't take all the actions in place, but even 100-200K addition due to CV-19 would be a 5-10% "spike" for the USA. https://www.cdc.gov/nchs/data/nvsr/nvsr68/nvsr68_06-508.pdf

At some point it will make sense to restart the economy instead of waiting to save the last few lives. Might be once we're convinced our healthcare resources won't be overwhelmed, including accounting for a second wave.

 

[Car-Guy]

Experts say if we do everything right, the death count will be 100K-200K.

If we do nothing, a lot higher, in the million.

Compared to that, auto accident deaths are peanuts.

Actually I agree with that. But, what if we did nothing to control the use of cars and guns. I suspect the number of deaths there would skyrocket too. To me it seems to be trade offs on the degrees of mitigation.

 

[Ian S]

So there are no consequences to endlessly printing money in the hopes of saving every last life? We can print money to sustain 20% of the workforce even if it takes 6 months to save that last life? This in a world where 36,000 people on average die from flu in the US each year and about the same number die in traffic accidents and almost no one bats an eye.

You said "we can do both i.e. save lives AND the economy" - there's a tradeoff as much as we don't want to face it.

Endlessly? C'mon 6 months is not "endlessly." And yes, the consequences will be minimal especially if we can save most business and the economic structure. The only semi legitimate argument you can make about massive government spending is the inflationary one and in the severe deflationary environment we're probably in now, that simply won't be a problem.

Obviously, we're not going to save every last life since we're probably on our way to losing 5 times the annual flu toll if we're lucky. And it's not just the deaths. It's the strain on our healthcare system when it not only can't deal with COVID-19 patients but also won't be able to deal with the normal heart attacks, strokes, accidents, cancer, etc. The increased death toll will be far beyond that for COVID-19 alone.

 

[Midpack]

Endlessly? C'mon 6 months is not "endlessly." And yes, the consequences will be minimal especially if we can save most business and the economic structure. The only semi legitimate argument you can make about massive government spending is the inflationary one and in the severe deflationary environment we're probably in now, that simply won't be a problem.

Obviously, we're not going to save every last life since we're probably on our way to losing 5 times the annual flu toll if we're lucky. And it's not just the deaths. It's the strain on our healthcare system when it not only can't deal with COVID-19 patients but also won't be able to deal with the normal heart attacks, strokes, accidents, cancer, etc. The increased death toll will be far beyond that for COVID-19 alone.

We'll see. I hope you're right, even if you won't acknowledge the trade off. We can't do both, which is what you led with...

 

[NW-Bound]

Of course at some point, people have to leave their home and go back to work. Not everybody is a retiree like myself who stays home and surfs the Web and shoots the breeze.

But is it not a bit too early to talk about that? We need to see the daily death rate starting to come down. And they say that will happen in May.

By that time, perhaps officials have seen enough carnage and also the effects on the economy in order to make the right trade offs. We have not been through this before. Everyone, including the experts, is still learning as things evolve.

 

[davismills]

We were warned that the numbers would go up dramatically after more tests were administered and I would keep that in mind. I believe the accuracy has been fairly predictable...at least I hope.

The economy will recover at some point, but it's pointless to predict when that will be. To try and extrapolate at this point is somewhat futile, so I'm letting the "dogs lie" for a few weeks and will re-evaluate then.

 

[rodi]

Midpack -

I don't think anyone is suggesting there aren't costs/consequences to the quantitative steps the fed is taking and consequences to the social distancing policy will have on the economy.

I'm almost hesitant to ask - but what are you suggesting be done differently, and how do you see the consequences of your suggestions?

It's one thing to criticize (which you are doing) - but another to offer an alternative.

 

[daylatedollarshort]

Bill Gates said something along these lines - It is pretty hard to tell people to go back to work and eating out and just ignore that pile of dead bodies in the corner.