Policymakers must ensure more COVID relief doesn’t damage the economy
A new round of financial relief to assist a COVID-fatigued economy and frustrated American workers is inevitable. Congress, the Federal Reserve and the Treasury have already taken bold actions to support the U.S. economy in the face of disaster. The good news and the bad news, however, are wrapped up in recent statements by Fed Chairman Jerome Powell and Michael Saylor, the CEO of MicroStrategy Inc. Chairman Powell says that the Fed will do whatever it can “for as long as it takes” to ensure that the recovery will be as strong as possible, while limiting lasting damage to the economy. Michael Saylor says it’s time to abandon U.S. government securities and invest in Bitcoin.
There is always an economic price for the financial distortion that government intervention can have. When it comes to more COVID-19 relief, the U.S. economy, laboring under enormous debt burdens already, cannot afford another round of relief that is not wisely targeted. Arbitrarily dumping money into the economy like a jetliner dumping fuel before an emergency landing may achieve a safe landing but create harmful long-term economic impacts.
Since the inception of federal oversight of banking and the economy in 1863, there have been no fewer than eight financial crises in America, with Congress subsequently enlarging the government’s management of the financial sector after each one, making it more difficult to “normalize” the economy. After the panic of 2008, new regulations incentivized how banks allocated capital, making government securities an even more favored choice, and, by the way, further supporting ballooning government debt. There has been little to no analysis of the impact of such reallocations and movement of money on the economy.
Zero interest rates have made credit attractive but torpedoed the long-term investment strategies of a generation of senior American investors. It has also left the Fed with fewer weapons to battle future economic strains. Massive Fed purchases of mortgage and asset-backed securities have maintained prices and liquidity in those markets and avoided massive collateral calls. But they are also affecting the underlying risk incentives in those markets. Institutions from Fannie Mae and Freddie Mac to commercial banks have been asked to absorb credit losses and other repayment suspensions creating a form of trickle-down forbearance economy. But at some point, such forbearances only obfuscate the losses that are piling up as the economy scuffles.
Foreclosure, eviction and other repayment moratoria relieve stressed Americans from a burden they may not be able to bear due to no fault of their own. But someone takes the financial hit for every payment that is missed or delayed. Credit and liquidity are available thanks to the rollout of a dozen or so Fed programs and Treasury lending programs, but it increases the chances that long-term risks in the economy are being camouflaged and inevitably mispriced. As the Fed prints money to irrigate the economy and tries to counteract threats of inflation, deflation and stagflation, we get closer to the precipice that we can only see after we have passed it and the stature of the dollar as the global currency comes into question. The announcement that MicroStrategy Inc. moved $425 million in cash from government securities to Bitcoin, where it feels that it is safe and more likely to earn a return may be the canary in the financial coal mine.
As the government exerts more control over U.S. money, banking and commerce, it also inadvertently creates a spectrum of dynamics that it can’t control and which can impact the future stability of financial markets. This tension between market forces and such government policies creates a kind of alternative financial universe that creates different risk reward rules. The authors of a recent book, “The Rise of Carry” argue that increasing government intervention has, for example, incentivized firms to assume greater amounts of risk given the expectation that when the inevitable collapse occurs, the government will bail out the economy and the big risky bets for which they were handsomely compensated for many years before the fall.
The need for the financial support of the government will continue to grow, but the only way to limit future damage is to customize those actions and better understand how to reverse them. Technology is the vehicle that can get the government there. More data – the byproduct of technology – can foster more efficient and less redundant and counterproductive forms of government intervention. Government policymakers must begin to implement their decisions informed by the benefits of algorithmic analysis of Big Data and sophisticated forms of artificial intelligence that can think faster, better and in more dimensions than humans can.
When it comes to COVID-19 relief, policymakers should be relying on data that can determine with pinpoint accuracy what government assistance is necessary, who needs it the most and where it can be most effectively and efficiently deployed. Such data would also help policymakers decide when and how the government’s financial spigot can best be turned off and the process reversed as disruptively and quickly as possible. In the 21st century, a little more analytics and a little less politics will help the government avoid damaging the economy for years to come in the name of saving it today.
Thomas P. Vartanian, formerly a bank regulator at two different federal agencies, is the executive director and professor of law of the Program on Financial Regulation & Technology at the Antonin Scalia Law School at George Mason University. He is the author of “200 Years of American Financial Panics,” which will be published in early 2021.