Coronavirus in the U.S.

An alarming unintended consequence of President Donald Trump’s misguided trade war with China has suddenly threatened to cripple the US fight against the COVID-19 pandemic. The administration’s tariffs on Chinese medical products may contribute to shortages and higher costs of vital equipment at a time of nationwide health crisis. In the last two years, Trump’s policy has forced China to divert the sales of these products—including protective gear for doctors and nurses and high-tech equipment to monitor patients—from the United States to other markets, and now the US medical establishment faces looming trouble importing these necessities from other countries, which may be hoarding them to meet their own health crises.

The market for U.S. Treasury securities came close to the breaking point during the week of March 9-13. […] On Thursday, however, traders reported spreads as high as 50 basis points.

The Federal Reserve Bank of New York announced plans to lend $1.5 trillion to banks and financial institutions “to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak,” Thursday March 12. The next day it announced that it would purchase $37 billion in United States Treasury securities, again citing disruptions in the market for these bonds. The $1.5 trillion operation announced on March 12 allows banks to borrow from the Fed for periods as long as three months, using Treasury securities as collateral. This enables banks and other financial institutions to access needed funds without having to sell the Treasury securities outright, which could cause disruptions if a widespread sale flooded the market for these bonds.

In the context of this pandemic, we need a new form of social insurance, one that directly targets and works through businesses. The most direct way to provide this insurance is to have the government act as a buyer of last resort. If the government fully replaces the demand that evaporates, each business can keep paying its workers and maintain its capital stock, as if it was operating under business as usual. […] How much would such a buyer-of-last report program cost? An economy-wide fall in the demand for goods and services of 40% over 3 months leads to a 10% drop in annual GDP. The government can fully compensate private losses by transferring 10 points of GDP to the private sector, financed via an increase in public debt.

• An immediate shift by the Fed to level targeting, combined with a commitment by the Fed to buy whatever it takes (of any asset necessary) to quickly return to its price level (or NGDP) target path after the immediate crisis is over.
• Fiscal programs strictly targeted to meet humanitarian needs, such as extending the unemployment compensation program beyond 26 weeks if the coronavirus epidemic lasts for more than 26 weeks.
• There should be no bailouts of bankrupt firms, except perhaps in extreme cases of essential services. People that bought junk bonds (like me) should accept their losses. That’s how capitalism works.