Tumbling markets are more than a symptom of
economic distress. They can cause it, too. Mark
Zandi, chief economist at Moody’s Analytics,
calculates that every $1 of wealth lost to falling
stock prices reduces by nearly a nickel spending
by consumers, who drive about 70% of U.S.
economic activity.
After a slow start, U.S. policymakers are moving
aggressively to limit the damage. The Fed on
Sunday slashed its benchmark rate to nearly
zero and said it would buy $700 billion in bonds
to try to ease credit market disruptions and keep
long-term rates low. On Tuesday, the Fed said it
would take steps to ease the flow of the short-
term credit that businesses use for payrolls and
other everyday costs.
In a recognition of the gravity of the threat,
the Trump administration is backing a roughly
$850 billion emergency stimulus package,
which would include sending checks directly
to American households to help tide them over
during the disruption.
Will it all work?
Zandi at Moody’s Analytics said the economy’s
return to health depends not just on what
happens to the virus and how policymakers
respond. Also crucial is the mindset of ordinary
consumers and business owners whose lives
have been upended by the health crisis.
“How long it takes for businesses to feel
confident enough to allow their employees to
get back to work and travel and for tourists to
get back on planes and cruise ships... whether
the collective psyche holds together,” he says.