Once again, markets are crashing and taxpayers are bailing out wealthy insiders. It’s time we reform this perverse social contract.
At a time of coronavirus-induced panic in the financial markets, there are two wrong ideas about supporting the economy in a downturn that still haunt us. One possible upside of the current crisis is that these two ideas may finally be buried for good. And when they are, we might use this rare moment of clarity to fundamentally rethink who these markets, and their perennial bailouts, benefit in the first place.
The first of these ideas is that investors, when they decide to buy or sell their assets, are responding rationally to information. That is, markets are “efficient,” and therefore the best way to organize how a society chooses to invest. This idea is challenged by what we have seen in the financial markets over the past two weeks. Panicking investors are responding to uncertainty, not information. Central banks around the world have rightly intervened to try to stabilize markets that have been anything but efficient.
The second is that the best way to deal with a collapse in spending by consumers and companies—such as we face as a result of the coronavirus pandemic—is to restore confidence by cutting government budgets, also known as austerity policies. That governments around the world have rushed to announce emergency spending measures to compensate for a sudden and colossal seizure in economic activity suggests that this bad idea, too, is finally dead.The response so far has been mostly impressive. Why, then, are markets still falling?
Attempts to stabilize the markets began last week. The U.S. Federal Reserve has cut interest rates as low as zero, pumped liquidity into the markets for Treasury bills and commercial credit, and relaxed collateral rules and reserve requirements for banks to keep cash flowing. Congress is now debating not whether to spend, but how much—up to $1 trillion. The executive branch has authorized a payroll tax deferral of 90 days and is planning direct cash transfers to households.
After sitting on its hands last week, the European Central Bank has now announced its own “bazooka”—a 750 billion euro ($800 billion) bond-buying program, looser collateral requirements, a new refinancing program for banks, and an expansion of existing “quantitative easing” programs. Various fiscal spending programs are emerging too.
The response so far has been mostly impressive. Why, then, are markets still falling?
The most obvious answer is that the fiscal response is not big enough and that more must be done. We think that’s half-right. More must and will be done. But maybe we should return to that first bad idea about the efficiency of markets. Are these markets that we have built—that we are bailing out again with taxpayer money, and that are tanking our savings and retirement plans once again—really fit for their supposed purpose?
One clue that the markets aren’t working for us are those U.S. airlines that are now asking for a $50 billion bailout. Those same airlines spent the past decade abusing customers, charging usurious fees for basic services, and squeezing their employees. They then used almost their entire free cash flow to buy back their own shares, juicing the returns to stockholders and C-suite insiders while leaving the companies themselves financially fragile. Surely their shareholders and management deserve to bear the cost this time around?
The airlines were not alone. Since 2008, the world’s corporations have accumulated debts totaling some $13.5 trillion, as they counted on the Fed and other central banks to keep interest rates near or below zero for the long term. Yet rather than invest the cash they raised in productive investment, including in their employee’s skills, they used most of the cash to buy back their shares and award themselves profits on their options. Why bother with real engineering when financial engineering is so much easier? And now this pile of debt may also have to be bought or guaranteed by the Fed, which is backed by the taxpayer at the end of the day.Why do we continue to aid and abet a small class of insiders using their overleveraged companies to extort bailouts from society?
The result of such largesse and excessive risk-taking was to make the system as a whole extremely vulnerable to a shock. This was the lesson we should have learned in the previous financial crisis—instead, we doubled down. This vulnerability reaches all the way down to the ordinary people our market economies are supposed to serve. In 2016, most Americans still had not rebuilt the wealth they had in 2007. Nearly half of Americans would struggle to get $2,000 together in a crisis, and even a $400 expense could render many insolvent. At the same time, the United States has cut taxes to the tune of $1.5 trillion, almost all of which went to the richest Americans—the same folks who own almost all the stocks and bonds that are now tanking, and who will benefit the most from any bailouts.
Let’s stop for a moment and ask what society needs most at this moment. In fact, let’s ask a more fundamental question: Why do we continue to aid and abet a small class of insiders using their fragile, overleveraged companies to generate their own profits and extort bailouts from society? Should we not fundamentally rethink this perverse social contract, and reform markets so they cannot hurt us this way in the future?
Given this moment of clarity, we should recognize that governments around the world face a crisis that they can turn into an opportunity. As a first step, there is a compelling case for a “post-interest rate” monetary policy that no longer relies on interest rates as a primary lever to influence markets. Specifically, central banks should directly finance government spending and directly finance or underwrite credit to important sectors of the economy.
With interest rates near zero or negative, governments have immense, unused fiscal firepower. Central banks can make this clear by explicitly outlining the scope of available spending, or directly requesting governments to spend. For the Federal Reserve, the necessary step is to directly finance the stimulus by offering to buy all the bonds issued by the U.S. Treasury, as well as publicly underwriting the markets for Treasury bills and asset-backed commercial credit in order to guarantee liquidity. No more temporary liquidity injections, but a public guarantee that investors will be paid.
Tax rebates to corporations and direct support for households, already underway, should be extended for the duration of the crisis. Such credit and liquidity support should be targeted at ensuring that corporations are able to pay all creditors, and most importantly, to pay their employees. Speed is of the essence. Moreover, the process should be beyond partisan politics. Neither Congress nor the executive branch, but the Federal Reserve, should issue monthly checks to workers. When conditions normalize, the checks should stop.
But we can and should go further.
What this crisis has exposed is not just the asymmetry of who benefits from financial markets, but the complete lack of assets in the hands of ordinary people that they can fall back on in moments of crisis. This is a time to begin to rebuild those assets, make our society less fragile, and reform markets so that they are no longer a public liability that only benefits a tiny class of insiders.
- First, use this moment to establish a citizens’ wealth fund. Such a fund would buy up all the heavily discounted equities in the stock markets that have been dumped by panicking investors. It would be cheaply financed by issuing government bonds at current near-zero interest rates—safe assets craved by investors in the current moment. Not only would this help set a floor under share prices, but this time around the fund would not hand back any shares to the private sector at the end of the crisis. Rather, the fund would keep the shares in trust for the nation, manage its holdings passively and independently, and pay out the long-run equity upside to citizens who lack assets, as we describe in our forthcoming book, Angrynomics.
- Second, let’s attack the core issues creating inequality and social fragility—housing and student loans. The almost exclusively private provision of housing since 1980 has made owning a home beyond the reach of most workers, especially in urban areas. Add to this diminished consumption among young people due to the combination of excessive debts and low wages, and you get conditions for permanent low growth even in the absence of a pandemic disease. Ordering the Fed to take over the student loan book, effectively doing for Main Street what it already does for Wall Street—combined with a commitment to build much more public housing over the next decade—would boost construction employment while redistributing wealth from asset-rich homeowners to asset-poor renters, buoying overall consumption.
- Third, this time, let’s get serious about reforming financial markets so that they actually produce wealth for all.This time, let’s get serious about reforming financial markets so that they actually produce wealth for all. Buybacks should be banned or limited for legitimate balance-sheet management. When a firm such as Boeing spends 74 percent of its free cash flow on share buybacks, that firm’s fragility becomes everyone’s problem. Likewise, credit rating agencies should take a much more skeptical eye to corporate debt, downgrading heavily indebted companies and removing the incentives for ever-higher financial leverage so that future bailout risk is reduced. And can we please rethink high-frequency algorithmic trading of equities by hedge funds and other financial institutions? With computers now making roughly 40 percent of all stock trades, we have created the ultimate perverse feedback loop as these programs feed on the very volatility that the monetary authorities are trying to calm.
- Fourth, let’s take antitrust seriously again. Market concentration has become an issue across large parts of the economy, with too-big-to-fail companies and quasi-monopolies cropping up everywhere, from the banking sector to pharmaceuticals. And while we are at it, the one part of the economy that is bound to do well in the current moment is digital services, whose leading companies like Google and Facebook have near-monopoly profits. Let’s start selling them the data we currently give away for free so we can share in their growth too, just like we do with mobile spectrum auctions for telecommunications companies.
- Fifth, let’s finally deal with health insurance. If this crisis doesn’t convince us that having almost 30 million uninsured Americans is not a problem that affects everyone, then nothing will. Whether you call it “Medicare for All” or something else, basic health insurance for all Americans—insurance not held captive by private insurance companies which actively seek to avoid anyone facing health risks—should be an obvious priority.
In sum, the United States and Europe need to go much farther than they have with their barrage of market interventions over the past week. But they should think beyond the immediate crisis to fix the underlying fragilities that made this crisis so severe in the first place. The EU and its members have no excuse except boneheaded adherence to rules that are clearly not fit for the purpose. The United States has no excuse at all. Armed with the global reserve asset, the U.S. dollar, the United States has all the flexibility and resources to turn this crisis into an opportunity.