Thread: The bulk of government action over the next few months should be directed to keeping afloat the many businesses with #coronavirus-related short-term cashflow problems.
The correct lever to pull here is not "#stimulus" (i.e. sending consumers checks) but "#lending".
1/8
The correct lever to pull here is not "#stimulus" (i.e. sending consumers checks) but "#lending".
1/8
Governments are rightly trying to "flatten the (infection) curve".
The more they succeed in this, the more businesses are headed for trouble. Some businesses just can't be run on ecommerce & work-from-home e.g. airlines, sports teams, restaurants, shows, most manufacturing.
2/8
The more they succeed in this, the more businesses are headed for trouble. Some businesses just can't be run on ecommerce & work-from-home e.g. airlines, sports teams, restaurants, shows, most manufacturing.
2/8
Governments will need to spend most economic policy efforts supporting businesses that are short-term insolvent (fewer customers, fewer employees) but medium-term viable.
The best vehicle for that is probably bank guarantees - ie what Obama did for GM, but on bigger scale.
3/8
The best vehicle for that is probably bank guarantees - ie what Obama did for GM, but on bigger scale.
3/8
The case is made by:
- John Cochrane in @BaldwinRE's "Economics in the Time of COVID-19"
- @pogourinchas in “Flattening the Pandemic and Recession Curves” (link below).
They are both worth reading.
4/8
drive.google.com/file/d/1mwMDiP…
- John Cochrane in @BaldwinRE's "Economics in the Time of COVID-19"
- @pogourinchas in “Flattening the Pandemic and Recession Curves” (link below).
They are both worth reading.
4/8
drive.google.com/file/d/1mwMDiP…
@pogourinchas argues priority must be to "flatten the economic curve" i.e. keep alive viable business which this short but very sharp downturn would kill.
Cochrane: We need to be able to "turn the economy back on again". Too many bankrupt firms, and that won't happen.
5/8
Cochrane: We need to be able to "turn the economy back on again". Too many bankrupt firms, and that won't happen.
5/8
For a short-term business cashflow emergency, short-term loans are the right remedy. The RBA and probably federal government will need to support the banks in this, via guarantees.
We'll need a lot of loans. That will be messy. As in 2008, money will go to the wrong people.
6/8
We'll need a lot of loans. That will be messy. As in 2008, money will go to the wrong people.
6/8
I've argued for "stimulus" myself, because I hadn't thought through the implications of large-scale "social distancing".
As this realisation spreads, yields will likely keep rising.
This episode is very different from 2008, and needs very different responses.
7/8
As this realisation spreads, yields will likely keep rising.
This episode is very different from 2008, and needs very different responses.
7/8
The idea that more support needs to go to propping up businesses - far more than in 2008 - won't be popular, esp. on the left.
But 2008's problem was "consumers won't buy". 2020's problem will be "consumers *can't* buy".
So we must spend on keeping businesses alive.
8/8
But 2008's problem was "consumers won't buy". 2020's problem will be "consumers *can't* buy".
So we must spend on keeping businesses alive.
8/8
