We are one or two policy errors from something pretty awful. The massive policy response so far tells us we face a massive threat and a massive risk of a policy error. Maybe it all works out. But never lose sight of the risk. How long will our luck hold?
Your quiet spring day is shattered by a cacophony of sirens. Seemingly every fire engine and police car in the city are rushing somewhere. Helicopters appear and hover. Other cities police and fire trucks zip by. Eventually trucks full of National Guard troops rumble past. What do you do?
- Hunker down.
- Go back to business figuring “they” have it all under control.
I’m taking my cues from the unprecedented scale, speed, and scope of the economic response so far. Policy actions tell us we are facing a massive, unprecedented threat. Meaning without precedent. Meaning no-one has a playbook for dealing with it.
Lets take a look at those policy actions. The commonality is that some behind-the-scenes conversation got normally cautious, cowardly, prevaricating politicians to put their own careers at risk. They acted big. Something must have scared them big.
- The Fed and the Treasury pulled out all the stops. Every action taken since that 50bp rate cut in March has had “panic” written all over it. The Fed has likely broken the letter of the law by wading so deep into buying up private market assets. It definitely, knowingly broke the spirit of those laws. The folks at the Fed aren’t stupid.
- Congress acted… quickly and decisively!?! passed a massive spending bill at light speed a few months before an election. The bill solved the partisanship problem by funding everyone’s priorities. The Republicans got billions for big companies. The Democrats got billions for unemployment benefits that will permanently raise US wage levels. The sum added up to Trillions. Congress does nothing fast. Mitch McConnell does nothing bipartisan. And congress learned from 2008 that “bailouts” are political death down the line. Congresscritters are not (collectively) that smart. Something big stiffened their backbones enough to act big, fast and decisively.
- States rushed to re-open with unseemly haste. This panic signal seems to have been mostly missed. The politically smart (ie. cowardly) path for a Governor would be to re-open somewhere in the middle of the pack. Don’t get singled out for blame by opening “too early” or “too late.” So why did so many Governors rush to re-open?They knew they were risking blame for out-of-control case counts a few months later (as we are now seeing). What (or who) scared them into acting with such haste?
In all those decisions, you know the usual voices were advocating the usual caution and half-measures. So why didn’t we get the usual half measures? Because someone in the room presented an argument that amounted to an ultimatum; Do this or else… That “or else” was clearly terrifying. Normally spineless creatures stood up straight and marched into danger.
I’ve spent the last few months trying to guess at the full shape of that “or else.” I suspect it was (and is) a massive debt “house of cards” crisis. But we don’t really need to know the details. It was a big, dire, and unprecedented risk of disaster.
Looking ahead, the bet you are taking is that “the authorities” have that potential disaster corralled and under control. That seems like a pretty complacent bet to make. We are betting on the courage and competence of a class that is pretty reliably gutless and sloppy.
Or maybe we are just betting the Fed can do all the heavy lifting and save us all. That also seems like a pretty complacent bet.
To repeat the intro paragraph:
We are one or two policy errors from something pretty awful. The massive policy response so far tells us we face a massive threat and a massive risk of a policy error. Maybe it all works out. But never lose sight of the risk. How long will our luck hold?
