Inside the global race to prevent another
depression
The coronavirus crisis could transform economic
behavior for decades.
By BEN
WHITE, VICTORIA GUIDA AND MATTHEW KARNITSCHNIG 4/13/20, 6:22 AM CET Updated
4/13/20, 8:33 AM CE
Economic
firefighters around the world have a problem they’ve never seen before: a
lightning-fast economic collapse strapped to a virulent global pandemic and
wild, whipsawing financial markets threatening to amplify the damage.
From
Washington to Brussels to Frankfurt to Berlin and beyond, officials in advanced
economies are rolling out the biggest fiscal and monetary policy bazookas
they’ve ever imagined. Some of the players, notably U.S. Federal Reserve Chair
Jerome Powell and Treasury Secretary Steven Mnuchin, have forged a close
fire-fighting partnership echoing their predecessors’ during the 2008 financial
crisis. Officials who confronted the brink of economic calamity during a
European debt crisis that began a decade ago — such as German Chancellor Angela
Merkel and the new European Central Bank president, Christine Lagarde — are
revising their playbooks and trying to avoid renewing the divides of that
conflict.
Economists,
traders and average citizens are all too aware that those efforts can’t stop
the coronavirus, which is causing a once-in-a century human and economic
catastrophe that’s still playing out with no clear end in sight. They’re starting
to brace for a longer and deeper downturn than any of them imagined just a
month ago when the mass shutdowns began across the global economy. And they’ve
yet to grapple with the consequences of the economic damage rippling from the
largest and strongest economies to the smaller and weaker ones with fewer
resources.
The world’s
finance ministers and central bankers will gather virtually this week for the
International Monetary Fund’s semi-annual meeting of 189 member nations — a
pandemic-era replacement for the usual in-person gathering in Washington. At
the top of the agenda will be charting a course for fighting a global economic
collapse unlike any other in the IMF’s 75-year history.
The big
institutional players in this global economic drama are battle-tested veterans
— but this is a beast unlike any of them have seen.
“The depth
of the recession, just in terms of jobs lost and fallen output, will not
compare to anything we’ve seen in the last 150 years. The only question is
duration,” said Kenneth Rogoff, a Harvard professor and former IMF chief
economist who has studied every recent downturn. “The economic tools we are
using are important, but it’s a natural catastrophe or war — we are in the
middle of it and just getting out of it is kind of the main thing right now.”
The massive
infusions of cash from central banks and governments around the world will
help. But new approaches will ultimately be required, Rogoff argued, including
possible global debt moratoriums for emerging-market economies such as India
likely to be slammed by the virus. He also said central banks such as the Fed
may be forced into unprecedented steps to revive growth — such as lowering
interest rates below zero, a move the central bank has long resisted in part
because of mixed evidence of its effectiveness.
The big
institutional players in this global economic drama are battle-tested veterans
at spraying foam on the runway in the form of giant spending programs and an
alphabet soup of lending facilities and central bank interventions. The U.S.
Fed and Treasury just last week announced efforts designed to dole out more
than $2 trillion in loans to businesses and municipalities, on top of trillions
of dollars already promised through other lending and stimulus efforts.
But this is
a beast unlike any of them have seen.
Other major
downturns in recent decades grew out of market bubbles or economic policy
mistakes, from runaway inflation in the 1970s and early 1980s, to the savings
and loan crisis and Asian market meltdowns in the 1990s to the dot-com crash in
2000 and the 2008 financial crisis.
This time really
is different.
And while
central players including Powell, Mnuchin, Lagarde and Merkel are mostly using
tools that worked in the past, few seem to be wrestling more broadly with how
fundamentally the world is changing and what economies may look like once the
coronavirus pandemic is finally brought under control, a date that remains
largely unknowable and beyond the ability of economic policymakers to control
or even influence.
The Great
Depression transformed economic behavior for at least a decade. Many who lived
through it never returned to their previous ways. The coronavirus crisis could
do the same, suggesting the old playbook may help put out some short-term
fires, but an entirely new approach may have to emerge from policymakers around
the world.
“The Fed
and Congress have done an outstanding job so far,” said Liaquat Ahamed, a
former World Bank official and author of the Pulitzer Prize-winning “Lords of
Finance: The Bankers Who Broke the World,” a history of the Great Depression.
He cited trillions of dollars worth of emergency lending from the Fed and a
congressional rescue package worth 10 percent of the economy.
“Whether
that’s enough, I suppose, depends on how long you have to do it for. But when
this is all over I think we will have to ask the question of, what it is about
the U.S. economy that makes it so unstable when it gets hit?” Ahamed said.
“Europeans have mechanisms in place to deal with this that are a lot better
than we have. All these lines outside unemployment centers show we don’t have
the institutional mechanisms to deal with these kinds of shocks.”
Here’s a
look at what some of the biggest policymakers are doing now in the world’s two
leading advanced economies — Europe and the United States — and what they may
have to contemplate in the months and years ahead.
Germany
breaks its taboos and unleashes its weapons
Merkel’s
long political career took an unexpected turn in early March.
Up until
then, the German leader had been riding out her tenure as chancellor ahead of
her planned retirement in 2021. Her top priority had been to broker a solution
to the brewing refugee crisis on the Turkish-Greek border and quietly steer the
process of finding a successor.
But news on
March 8 that Italy’s prime minister had placed the northern half of the country
— including the country’s industrial heartland — under quarantine forced Merkel
to change focus.
With the
number of dead and infected in Italy rising exponentially, Merkel knew that the
hopes in Berlin that Europe could dodge a major economic crisis had been
dashed.
During a
seven-hour meeting with coalition partners in her cavernous Berlin office that
evening, Merkel won approval for billions in stimulus and other measures to
cushion the impact of the incoming storm.
It turned
out to be just a first step. Within days, as the potentially catastrophic
impact of the coronavirus became clearer, Merkel’s Cabinet had agreed, in the
words of Finance Minister Olaf Scholz, to “put all of our weapons on the
table.” That meant generous tax relief for companies both small and large and
credit guarantees worth nearly €500 billion.
“This is
the most extensive and effective guarantee we have ever made in a crisis,” said
German Economy Minister Peter Altmaier.
Just weeks
before, Altmaier, one of Merkel’s most trusted advisers, had downplayed the
economic threat posed by the coronavirus. But now, with the entire German
economy facing a shutdown, the stakes were clear. The Germans were falling back
on the playbook they followed in 2008 in the wake of the Lehman Brothers
bankruptcy, when Merkel’s government stepped in to prop up the country’s banks
with hundreds of billions of euros in guarantees.
This time,
guarantees alone weren’t going to be enough.
With large
swaths of German industry on hold, the government needed quick cash for the
legions of self-employed and to inject funds into hospitals and the small- and
medium-sized businesses that form the backbone of the German economy.
Even in an
emergency, securing those funds would be complicated. Doing so would mean
breaking the biggest taboo in German politics — running a deficit. One of the
keys to Merkel’s enduring popularity is that Germany has recorded a surplus
since 2015, what Germans call a “black zero.” But with economists predicting
the crisis could cost the German economy anywhere from €250 billion to €730
billion, it was clear to Merkel and her advisers that the black zero was
history.
Under
Germany’s constitutional “debt brake” — a rule adopted in 2011 to tame deficit
spending — governments need parliamentary approval to exceed budget limits.
Merkel planned to ask for €156 billion for 2020, an increase of nearly 50
percent over the current budget. In addition, the government planned to seek
approval for further loans and credit guarantees, bringing the total value of
the rescue package to nearly €1 trillion. Relative to the size of Germany’s $4
trillion economy, the package would be among the most aggressive of any
country’s, including the U.S. rescue package that was a tenth of its economy.
With the
crisis worsening by the hour, it had become clear that, like it or not, the ECB
needed to go big.
Germany’s
parliament, the Bundestag, fought tooth and nail for months over smaller sums
for Greece and other eurozone countries during the region’s debt crisis. Now it
was being asked to approve the largest financial rescue in the country’s
history in a matter of days.
Just as the
chancellor’s team was putting the final touches on the plan, it hit an obstacle
when Merkel was exposed to the virus. A doctor Merkel had visited on March 20
for an immunization shot had tested positive for the virus, and she was placed
under quarantine.
That meant
it would be up to Scholz, the finance minister and vice chancellor, to take the
deal over the line.
“What we
need now is solidarity,” he told legislators on March 25, as Merkel watched
from home.
They
agreed, approving the package by a comfortable margin.
Europe
debates debt (again) as the ECB revisits 'whatever it takes'
Putting
together a European package has proved more complicated.
With Italy
and Spain, the eurozone’s third- and fourth-largest economies, effectively shut
down as they try to bring the spread of the virus under control, leaders in
both countries have been looking to Frankfurt and Berlin for help.
Neither
country has the fiscal space to undertake the aggressive stimulus Germany is
pursuing.
Just how
exposed those countries — which bankers like to call the “Club Med” — really
are became clear on the afternoon of March 12 during Lagarde’s regular press
conference. Lagarde, the former IMF chief who took over the ECB in November,
was annoyed that national governments weren’t acting more forcefully to
confront the pandemic with aggressive fiscal measures. She worried members of
the 19-member euro currency bloc would once again put the onus on the central
bank to act through asset purchases, a course many economists argue is little
more than a short-term fix.
“We are not
here to close spreads,” Lagarde told reporters, signaling the ECB was not
prepared to intervene in the market to keep a lid on southern Europe’s
borrowing costs. Lagarde also said she didn’t intend to represent “whatever it
takes, No. 2.”
In the
space of a few seconds, Lagarde appeared to have reversed her predecessor Mario
Draghi’s famous pledge during Europe’s debt crisis in 2012 to do “whatever it
takes” to save the euro.
Italian
bonds posted their steepest drop in a decade following Lagarde’s remarks,
prompting frantic calls from Rome. Spooked by the market reaction, Lagarde, a
trained lawyer whose suitability for the ECB role some questioned, went on CNBC
to repair the damage.
She
insisted she was “fully committed to avoid any fragmentation in a difficult
moment for the euro area.”
But the
damage was done. The next day, she apologized to her colleagues on the ECB’s
governing council who had gathered for a conference call.
In Rome,
Italian Prime Minister Giuseppe Conte worried the shutdown he had mandated
would leave the country starved for cash
With the
crisis worsening by the hour, it had become clear that, like it or not, the ECB
needed to go big.
In the days
that followed, Lagarde’s team at the ECB’s Frankfurt headquarters — an imposing
structure resembling a giant glass shard — assembled a sweeping €750 billion
package to stabilize the markets through asset purchases. While the bank had
pursued a similar strategy in the past, this time Lagarde was proposing going
even further by lifting the controls on how much debt the central bank could
hold of each individual member. Those constraints were put in place during the
euro crisis to shield the bank from accusations it was effectively printing
money without limit to keep its members afloat, a point of particular concern
to Germany and other northern members of the currency bloc.
Less than a
week after insisting she didn’t want to mimic Draghi, Lagarde was trying to
convince the ECB’s governing council to go even further.
During a
conference call on March 18, Lagarde told the head of the eurozone’s national
central banks that the pandemic had created “severe strains in the financial
markets.”
While some
members of the ECB’s governing council expressed reservations about lifting the
controls on bond buying, they relented.
Lagarde
ensured the central bankers that governments were now signaling more
willingness to play their part with spending initiatives.
Still, the
problem in southern Europe wasn’t willingness to act on the fiscal but the
ability to. In Rome, Italian Prime Minister Giuseppe Conte worried the shutdown
he had mandated would leave the country starved for cash, a shortfall it could
only fill with the help of its wealthy northern neighbors.
During a
videoconference summit of European leaders on March 26, Conte repeated a call
for the introduction of “corona bonds” backed by all countries in the eurozone.
Proceeds from the sale of such debt could be used to help the likes of Italy
and Spain. The advantage is that with Germany’s backing, the interest rate on
the bonds would be much lower than other countries could secure on their own.
“We need to
react with innovative financial tools,” Conte told his counterparts.
The idea of
mutualizing eurozone debt came up during the Greek crisis as well. For Germany
and the Netherlands and other northern European countries, it’s no less
controversial today than it was then. They worry the introduction of corona
bonds would open the door to further mutualization down the road, saddling
their countries with the burden of Southern Europe’s debt.
Even as
she’s writing blank checks at home in Germany, Merkel has so far responded to
her European counterparts with a strict “nein,” infuriating southern Europe’s
leaders.
“Do you not
understand the emergency we are going through?” an exasperated Spanish Premier
Pedro Sánchez asked Merkel during the videoconference.
The German
leader insisted she did. Even so, corona bonds remained off the table.
That’s
mainly because she knows her own party would never accept a deal requiring
Germany to take on other countries’ debt.
The
European summit nearly collapsed over the issue with Conte and Sánchez warning
of dire consequences if there wasn’t an agreement.
The leaders
punted the issue to their finance ministers. Last week, after an angry debate
during an all-night session, they finally agreed on a €540 billion package of
credits and loan guarantees to help flagging members.
The only
question is whether it will be enough.
Trump’s
trusted Treasury secretary joins arms with the Fed chair
U.S.
Treasury Secretary Mnuchin, though generally calm and subdued in public
appearances, has been a frenetic actor behind the scenes, consistently on the
phone and in meetings with the Fed chair, congressional leaders and White House
officials as the economic point man for U.S. President Donald Trump — one of
the few top officials to maintain the president’s confidence throughout his
term. Mnuchin personally shuttled between congressional offices last month
negotiating between a Democratic House speaker and Republican Senate majority
leader for a $2.2 trillion program, H.R. 748 (116), to save major industries,
rescue small businesses, issue checks to most Americans and bolster
unemployment benefits.
He’s racing
against grim signs of damage across the economy, including 17 million new
jobless claims in the U.S. in just three weeks with millions more on the way.
It’s a scale of devastation beyond what the U.S. saw across the entire course
of an 18-month recession tied to the 2008-2009 financial crisis.
Over the
last two weeks, the U.S. Treasury and Fed have held calls every day at 5 p.m.,
led by Mnuchin and Powell and including other senior staff. But Mnuchin and Powell
talk multiple times a day on their cell phones, often well into the night —
“sometimes five times, sometimes 30 times,” according to the Treasury chief.
On the
financial markets side at least, the Powell-Mnuchin power pairing appears to be
working.
The calls
reached fever pitch last Wednesday, as Treasury and the Fed prepared to jointly
announce the massive $2.3 trillion intervention by the central bank, timed to
hit the news wires just ahead of another disastrous report on unemployment
claims on Thursday morning, which wound up showing 6.6 million Americans filed
for benefits.
The plan
included multiple facilities with complicated names to plow money into the
cratering economy. Staff at Treasury and the Fed worked until well after
midnight Wednesday night putting the necessary documents together to make the
moves legal, which under section 13(3) of the Federal Reserve Act required the
signature of the Treasury secretary.
After a
brief respite, work on the papers began again at 5 a.m. Thursday, with Powell
and Mnuchin resuming their phone conversations as the clock ticked toward the
8:30 a.m. release of the devastating jobless figures.
The final
documents bearing Mnuchin’s signature authorizing the giant intervention did
not arrive at the Fed until 7:55 a.m., five minutes before the central bank
planned to send out an embargoed press release to give reporters time to
prepare stories that would hit right at 8:30 a.m.
The frantic
effort largely upstaged the market impact of the job losses. CNBC immediately
switched from covering the unemployment news to offering details of the Fed’s
intervention. Investors also ignored the jobless claims figures on Thursday and
celebrated the Fed’s moves, sending stocks up hundreds of points.
On the
financial markets side at least, the Powell-Mnuchin power pairing appears to be
working. After bottoming out on March 23, stocks have mounted a remarkable
comeback — celebrated by Trump on Friday — though the Standard & Poor’s
500-stock index remains around 18 percent below highs hit in February.
It was a
moment reminiscent of the partnerships between then-Fed Chair Ben Bernanke and
Treasury Secretaries Hank Paulson and Tim Geithner during the 2008-2009
financial crisis. Bernanke, first with Paulson then with Geithner, often timed
announcements to beat the opening of Asian markets on Sundays — their attempt
to calm tanking markets and get ahead of grim news.
A dealer
with Democrats in a bitterly partisan era
Mnuchin is
serving as the Trump administration’s economic deal-maker by building
functional relationships with Democrats, the result of a lesson learned from
Trump’s biggest economic legislation before now: the 2017 tax cuts, H.R. 1
(115).
People
close to the Treasury secretary say that during that effort, when Mnuchin took
a back seat to top officials such as then-National Economic Council Director
Gary Cohn, he learned during the highly partisan debate that building
relationships with Democrats on Capitol Hill really mattered. Also key was
being viewed as speaking directly for Trump, to the limited extent that anyone
but Trump himself can do that.
“After tax
reform he’s been very careful to solicit Democratic members’ concerns, as well
as Republicans of course,” one person close to Mnuchin said. “Quite frankly,
over the three years he’s been there, he’s figured out Washington better,
certainly better than when he first got there. He’s learned to play the game.”
On
Thursday, Mnuchin said he thought the economy could reopen in May.
Mostly,
Mnuchin grabbed the lead slot on the rescue package by getting tighter with
House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer. “I think
they’ve come to view him as not that political a guy, not a backslapper,” this
official said. “He kind of just says what he means and I think Democrats sort
of figured that out.”
A second
official close to Mnuchin said that in Hill meetings, as discussions skidded
into partisan rows, the secretary often served as the person to keep them
focused on the core items — moves that ultimately satisfied Democrats and
enlarged the rescue package. “He was the most uniquely positioned person to do
this for Trump given he has the president’s confidence and knows with as much
certainty as anyone how the president will react to things.”
During the
frenetic, often late night talks over the rescue package, people close to the
matter say Mnuchin relied most heavily on White House Legislative Affairs
Director Eric Ueland; Deputy Treasury Secretary Justin Muzinich, who has deep
experience on Wall Street; and Treasury General Counsel Brian Callanan. Despite
the large staff at his department, Mnuchin has long preferred to lean on a
small group of trusted advisers.
Mnuchin on
Friday morning helped broker what appeared to be an agreement with Schumer to
open bipartisan talks on the next chunk of coronavirus relief from Congress.
But partisan lines over the money hardened again over the weekend, and it
remained unclear whether Mnuchin could actually play any kind of peacemaker
role.
While
Schumer has complained that Senate Majority Leader Mitch McConnell didn’t reach
out to him and McConnell’s allies say Schumer isn’t negotiating in good faith,
there have been few Democratic complaints about Mnuchin. At the same time, the
Treasury secretary doesn’t exactly speak for the ideologically diverse Senate
Republican Conference, leaving some negotiations akin to a game of telephone.
It can appear to succeed one moment, then fall apart the next.
Mnuchin has
also emerged as one of the key players in a variety of largely amorphous groups
inside the White House working on plans to reopen the economy as soon as
possible, a top Trump priority in regular tension with the advice of the
president’s top health advisers. On Thursday, Mnuchin said he thought the
economy could reopen in May.
The Fed,
backed by taxpayers, creates bazooka after bazooka
Working
remotely like almost everyone else at the nation’s central bank, Powell is on
the phone for most of the day from his home office — as much as 12 hours
straight — while his television is tuned to CNBC, or occasionally Bloomberg TV.
On the other end of the phone line is a laundry list of policymakers: his
staff, fellow Fed board members, the heads of the regional Fed branches,
members of Congress, foreign central bankers, as well as Mnuchin and his
deputy, Muzinich.
Powell’s
in-person press conferences have been replaced by teleconferences. What were
once highly anticipated public events are now webcasts. And the audience he’s
trying to reach is broader than the usual world of policymakers and traders.
His stated
goal is to work both within and outside the Fed to help the U.S. economy make
it to the other side of the crisis — and ensure the central bank’s stunning
array of actions keep their potency against endless skepticism about the
strength of the Fed’s ammunition.
“The
Federal Reserve is working hard to support you now, and our policies will be
very important when the recovery does come, to make that recovery as strong as
possible,” the Fed leader said in a rare TV interview on NBC’s “Today Show.”
Many of the
programs rolled out by the U.S. central bank are reruns from the 2008 financial
crisis.
Together,
the Fed and Treasury have announced nine emergency lending programs so far,
part of an effort to ensure households and companies have the ability to borrow
money and that financial markets don’t fall apart.
The
emergency programs are the backbone of the government’s economic response. Most
of the $500 billion set aside by Congress for businesses, states and cities is
allotted for Treasury to facilitate loans from the Fed by covering any losses
on those loans. The central bank also announced an effort to bolster the $350
billion in the congressional relief package for government-backed loans to
small businesses.
Fed staff
shoulder the bulk of the work on designing the programs, with direction from
Powell; Randal Quarles, the central bank’s vice chairman in charge of bank
oversight; and Lael Brainard, the last remaining Democrat on the Fed board who
chairs its committee on financial stability.
Many of the
programs rolled out by the central bank are reruns from the 2008 financial
crisis. But Treasury’s engagement has taken on greater importance as the Fed
strays further outside its typical role — of simply keeping money flowing
through the economy — and moves into directing credit to specific sectors. The
Fed has prioritized help to borrowers that Congress specifically said should receive
aid — namely, non-financial businesses and municipalities.
The central
bank’s actions are finding a response officials did not get in the 2008
financial crisis: praise from lawmakers for forceful, preemptive moves.
“The Fed
has taken massive and necessary action,” said North Carolina Rep. Patrick
McHenry, the top Republican on the House Financial Services Committee, in an
interview.
Congress
handing the Treasury Department taxpayer dollars to facilitate the Fed’s
efforts cleared the path early. “We now have the fiscal house in front of the
central bank,” McHenry said. “I think that is healthy and right. We don’t want
the central bank playing politics.”
The central
bank has worked for weeks on a “Main Street” lending program aimed at
medium-sized businesses, although it will likely be weeks before that offering
rolls out. The Fed also has yet to open the doors of its corporate credit
programs, under which it will purchase debt issued by large companies. But just
the announcement of those programs has helped corporate bond markets start
running a bit more smoothly.
Still, the
Fed faces a tough balancing act in using its lending to help companies that
merely need cash to get them through the next few months while not propping up
firms that are in trouble because of bad decisions made leading up to the
crisis, such as loading up on too much debt.
The Fed is
also working furiously to keep the U.S. dollar available in other countries, as
investors around the world seek refuge in the U.S. currency.
Meanwhile,
it’s been an ongoing struggle for the Fed to ensure proper functioning in the
market for U.S. government debt, which influences all other interest rates and
is a key investment globally.
The
institution is also working furiously to keep the U.S. dollar — used around the
world to trade, invest and borrow — available in other countries, as investors
around the world seek refuge in the U.S. currency. The Fed made it easier for
some foreign central banks to exchange their currencies for dollars, a move
designed to prevent the value of the dollar from rising too high as other
countries experience dollar shortages, which could have unwanted spillover
effects in the U.S.
But it
won’t be able to entirely shield the domestic economy from longer-term wounds
abroad, including in major emerging economies that might not have the resources
to contain the virus before a vaccine is widely available.
“The Fed is
serving as an international lender of last resort,” said Ramin Toloui, a
professor at Stanford University and former Treasury official across three
administrations. “But it’s beyond the capability of the Fed to address what
might be a solvency problem that could be emerging as a result of the real
economic harm that’s being done by the spread of this epidemic around the
world.”
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