Throw me a Lifebelt!

As governments took ever more drastic action to close markets and confine people to their homes, the question loomed of how to mitigate some of the worst consequences of this self-imposed state of siege. A Twitter thread of March 10^th offered up some initial thoughts, here lightly edited. Not being one to root for state or central bank intervention, with the spread of the coronavirus, its inevitability must sadly be faced. So, the question is: how to make it one of the least damaging kind while preventing it from becoming entrenched in the system and hence lead to another decade of distortion & waste like that which followed the GFC. The first problem is to try to avoid the failure of otherwise viable firms because of the disruptions associated with the global health emergency and how to spare their employees from ruin. Flooding money into financial markets is NOT the answer, Mr. Powell! Blind fiscal expansion, neither, President Trump Here’s the kernel of an alternative idea. Financial markets are desperate for a supply of so-called ‘safe assets’. Nominal yields on such as can be bought are therefore trifling; real yields are negative. Ergo,  the government should launch a special series of Treasury bonds to sate the market’s hunger & halt a collapse in yields which is potentially disastrous to, e.g., pension funds. NB: These bonds should be properly ‘funded’ – i.e., be issued to non-monetary institutions and so simply bolt a temporary Federal guarantee onto the already substantial sums of financial capital frozen in place due to the panic. Next, order the banks to exercise widespread forbearance with needy – but Bagehot Rule solvent! – firms and then place the UST special bond issue proceeds on deposit with them, pro rata – i.e., $1 per $1 of the debt now subject to moratorium. This would keep the banks safely liquid, reassure their depositors, and not scare their other counterparts too much. Next, tell the Fed & regulators to treat this internal series of ‘bad banks’ as ring-fenced from reserve and capital requirements, thus obviating any further action on their part. If necessary, the Treasury should offer at least a partial credit backstop – ideally subject to payment of a premium to discourage free-riding and or recklessness – in order to incentivise custodians of savings to buy replacement paper for maturing debt securities otherwise unable to be rolled over. All such measures should come with at least an effort to determine the going-concern status of the borrowers under the preceding, non-distressed conditions. All should have a strict retirement schedule worked out, once the crisis passes. Firms accessing the scheme MUST bear some costs to minimise free-riding: e.g., dividend and buyback freezes, and executive bonus suspensions or options grants until the assistance has been repaid. Firms retaining workers despite the slowdown could function as targeted welfare conduits by borrowing payroll shortfalls from a specially-purposed UST facility though steps would have to be taken to try to ensure that his, in itself, did not further weaken their balance sheets and hence their ability to function once normal operations have been restored. They could repay perhaps through forgoing tax-relief on deferred losses. Perhaps they could redeem their benefits by not immediately participating in the subsequent, recommended passage of a payroll tax holiday. However this is achieved, the idea is to keep the programme as simple to operate as possible, while also ensuring it is as granular and case-specific as possible. In fine, the intention is to ‘credit-wrap’ existing monies and use THEM to tide viable businesses over WITHOUT generalised inflation or by pumping more air into the Nasdaq, etc. Simultaneously, this would also limit the damage to pension providers and would avoid the dangers inherent in going down the NIRP rabbit-hole. As these things always have a cute name, I suggest: “Loan Intermediation For Entrepreneurs, Businesses, & Employees: Limited Term” – or LIFEBELT