Tyler Cowen posts an email he received that illustrates what I think most people get wrong about the appropriate policy for the crisis. Without getting into the specifics of he letter, I want to emphasize where I believe people are going wrong.
1. Worrying about bank liquidity before we worry about nonbank liquidity is exactly backward. This is not the financial crisis of 2008, where the big need for liquidity was on Wall Street. The big need now is on Main Street.
2. Worrying about solvency of the non-bank sector now, rather than worrying about liquidity, is exactly backward.
Government grants to keep individuals and businesses solvent are needed after we are ready to re-start the economy, not before. As Tyler and others have pointed out, our short-term goal is to reduce economic activity in order to slow the spread of the virus. That in turn creates a liquidity crisis for individuals who miss paychecks and businesses that miss revenue. As you know, I think we can deal with the liquidity crisis through government-backed credit lines. We should focus on the liquidity crisis now.
A solvency crisis may emerge later, particularly if the public health crisis lasts a long time, leading to an extended period of shutdowns. But the solvency crisis is not what the next few weeks are all about. Yes, a few businesses are on such thin margins that they may be insolvent now, but most can survive a few weeks provided that they have liquidity. Any business that has already become insolvent is probably not a business you can save in the long term.
3. If we are lucky, we won’t even have a solvency crisis. Suppose that in three weeks it looks like we can re-start the economy. This could happen if treatment capacity ramps up, which probably requires that we obtain success from one of the drugs we are trying. A more probable favorable scenario would be a dramatic slowdown of the virus, caused by a combination of the measures currently being taken and warmer weather. That might give us a few months’ respite, and perhaps in the meantime we can scale up hospital capacity and improve other public health policies, so that we won’t need to use shutdowns as a tool ever again.
I know this is an optimistic scenario rather than the most likely scenario. But there is no reason to rush into throwing money blindly at solving a solvency crisis that may not occur. If we wait a few weeks, we will have a better idea of the nature and scope of whatever solvency crisis lies ahead.
4. Let me add that Wall Street will clamor for Congress to do something. But a big stimulus package will make investors a little happier for a few hours, and then they will go back to watching the dashboards showing case spread rates and death rates. Congress will be told that they have to choose between plunging share prices and taking bold action today. They will take bold action today. After a few hours, we will be back to plunging share prices. Then what?
This is exactly right. I see the current shutdown as a stop-gap measure needed to reorient ourselves.
If I’m right about Cough Isolation being key to slowing the spread, then the focus will have to shift from Main Street in general to the parts of the Supply Chain directly involved in supporting the two settings for Cough Isolation: 80% Self-Isolating at home and 20% with acute symptoms in hospital.
This is a war effort. People have to be reassured that we have a chance to win. Next we have to pull together and execute.
Columbia Surgery internal update on COVID-19 from last Friday March 20.
The only good news I see is that they are discussing antibody-positive results which means they are using fast and accurate serum tests.
This worldwide metric of positive tests has to be replaced. It forces scared and symptomatic people out of their homes. In 14 to 21 days we will need a new signal to represent cases. The testing capacity has to be focused on the frontline health workers and their patients.
I couldn’t have written this better myself.
This worldwide metric of positive tests has to be replaced. It forces scared and symptomatic people out of their homes.
I don’t understand why this would force scared and symptomatic people out of their homes. I can understand increasing their fears, but I would think that would drive people into their homes. Do you have some other information? Do studies from past epidemics show this happens when people get more data about the status of the epidemic?
I worry that more data on increasing infections will cause uninfected people and the uninfected people they know to lower their probabilities of them becoming infected. (It’s happening to others but not to us). When the infection first started and my friends wanted more testing, my questions then and still are:
What will you do with the data?
Which policies would you implement and or change with more testing?
The only answers I received were either “I don’t know.” or “If things get worse, I’ll know to hunker down.” Of course, this is only anecdotal information but I suspect that if a large poll was done with those questions, the answers wouldn’t be much different.
A colleague who was raised on a ranch in ND once criticized a management decision as “One cow gets a tick and they dip the whole herd.” I asked him if that tactic’s effectiveness depended on the size of the herd. He agreed that it did. In our case we’re dealing with a mammoth herd.
Ernie, the Canadian approach, based mostly on travel related cases, is for all travellers to Self-Isolate for 14 days and Contact their provincial public health unit by phone and based on their case information the telemedicine nurse will recommend that some go to a testing facility. The health units have been reporting the daily new cases but the journalists finally noticed that the backlog is growing and the number of case histories are changing from “Travel” to “Pending”. The data is not representative of the important signal of sustained community transmission. Internally they are prioritizing testing based on the value of that signal. The people that have travelled and develop symptoms but are told to stay home and not test feel vulnerable like the system has abandoned them.
What I’ve gleaned from the press conference answers is that internally they are tracking Symptom Onset as the key metric and they are watching their live hospital data dashboards for signals of upticks representing sustained transmission.
I’ve been promoting Cough Isolation which means that people would report their Symptom Onset date and time over the phone to an organization aggregating the data. I don’t know if this is the replacement metric because it captures ALL respiratory illness but I think ongoing growth from this stat would be as useful as the current approach. We can also extrapolate based on hospital data.
When most people are safe we can test for antibodies to backfill the data for analysis.
I’ve been reading this:
https://www.cdc.gov/flu/pandemic-resources/pdf/pandemic-influenza-strategy-2005.pdf
A National Plan from 2005. Who knew?
Page 8 has this bullet point.
Emphasize the roles and responsibilities
of the individual in preventing the
spread of an outbreak, and the risk to
others if infection-control practices are
not followed.
I haven’t seen this emphasis yet. In order for your plan to work, everyone needs to emphasize that if you have the symptoms, STAY HOME, CALL YOUR DOCTOR. This message has to be repeated constantly. People also have to confront those in public with coughs and tell them to go home because they are dangerous. Grocery stores should monitor the entrance and refuse entry to persons that show symptoms. I know the hesitation “What if I’m wrong?” Perhaps some temporary protection for store owners would work. Although dangerous as a precedent, using the police to protect people from dangerous behavior may also be necessary.
Exactly, but another problem is that people over react. I think the Newfoundland premier (or one of the maritime provinces) yesterday said that when we encounter people that should be Self-Isolating outside of their homes we should ask them how we can help (while staying 6ft away). Physical panic is not voluntary. Extreme stress is not much better. People in Self-Isolation must feel supported and not fall back on their daily routines like walking their dog.
Its-Just-A-Cough will soon be an anachronism.
If you are going to consent to the economic lockdown, then now is not the time to worry about inflation or moral hazard. I would not be surprised to see spontaneous, populist “rent jubilees” along the West Coast, btw.
I prefer we end the lockdown, build a lot of tent hospitals with helicopter money and tough it out. Perhaps the Army Corps of Engineers and other military entities can build tent facilities rapidly.
Did we just collapse the global economy on behalf of the elderly smokers and other old people with comorbidities?
The cases will double every 7 days. It is my understanding that every ICU team includes a specialist trained to operate the ventilators. Industry can retool to build ventilators but doubling the ventilator specialists 7 days will be the key bottleneck in my rough estimation.
This brings up a question that will also be important in the post-COVID society. How much is a “trained ventilator specialist” actually required? Can a “smart high school graduate” be trained to be 99% as good in a week? How much is that certification required to do the job and how much is rent seeking?
It doubles every three days. The average daily growth is 32%.
On March 1 the US had 98 cases. On March 16 it was 4,663. One week later and it’s 35,500.
If this pace continues by March 30 we will have over 185,000 cases.
Do you think China collapsed its economy because of elderly smokers? Doesn’t seem like them. Maybe there is more to it.
I think one should always be cautions about claims that a party (either an individual or an institution) has a problem with liquidity but not solvency. As a general rule, a truly solvent party can always get out of its liquidity problem by borrowing from willing lenders against the positive expected value of its present assets and future net income.
If individuals and companies are solvent and only need loans to weather a few weeks or months of reduced incomes, then there is an obvious profit opportunity in lending to them, and financial institutions should already be jumping on it. Especially in our era of zero interest rates, where so many parties sit on piles of cash for which they apparently can’t find any opportunity for a safe positive yield. (And which have only gotten larger with the recent panic selling in the stock market.)
Therefore if the problem is really illiquidity, we shouldn’t need anything more than strong property rights for the lenders. But of course, that’s politically difficult. Perhaps even if nearly everyone is solvent, they may be illiquid because lenders are scared of being denounced (and possibly expropriated or prosecuted) as predatory usurers, especially those lending to individuals. (Which has indeed been the experience of many sellers of masks and other sanitary equipment in recent weeks, including some who didn’t even raise prices by any shocking amount.)
So perhaps there is really no option to avoid mass illiquidity except emergency government-provided cash of some kind. But then, just like strong property rights for lenders, any truly effective and prudent plan is likely to be equally fantastic under the present political reality. Hence again we’ll get money helicopters in full gear, raining the Blessings of Cantillon on politically favored parties.
There’s also the tricky question of priority in bankruptcy, the security of these government loans, and who takes how much of a haircut. Who really is getting bailed out?
The creditors at the level of the government claim are going to object to the extent that they might have to take a haircut when the alternative was wiping out equity first, for example, by the company diluting by selling enough shares to raise the money, and it’s possible this approach could have raised enough to money to avoid having to borrow at all, preserving their position entirely.
Perhaps the government could offer the emergency liquidity via some new, lower tier of debt, above all equity, but below all existing debts. If the company ends up going under anyway, all equity gets wiped out before the government has to take a haircut.