Corona virus monetary policy
John H. Cochranespots. Yes, you heard it here – judiciously targeted bailouts are really the only way I
can think of to keep businesses and people from going bankrupt given the absence of
pandemic insurance.
We need a detailed pandemic response financial plan, sort of like an earthquake, flood,
fire, or hurricane plan that (I hope!) local governments and FEMA routinely make and
practice.
Is there any such thing? Not that I know of, but I would be interested to hear from
knowledgeable people if I am simply ignorant of the plan and it’s really sitting there
under “Break glass in emergency” down in a basement of the Treasury or Fed. Without
a pre-plan, can our political system successfully make this one up on the fly, as they
made up the bank bailouts of 2008?
Then we have to figure out how to prevent the atrocious moral hazard that such
interventions produce. Pandemics are going to be a regular thing. Ex-post bailout reduces
further the incentive for ex-ante precautionary saving. Too good a fire department, and
people store gasoline in the basement.
This starts down the same bailout and regulate road that suffocates our debt-based
banking system. I welcome better ideas.
One might say a rate cut can help provide such liquidity. But the level of the overnight
rate is a very small issue to a business that needs a loan to keep up with mortgage or
rent, payroll, electric bill, debt payments when there is absolutely no money coming
in, it can’t buy supplies if there were, and the bank is refusing (rightly) to make such
a loan at any rate. So, yes, this dark view does argue for a sharp rate cut when serious
economic disruption hits. But it’s a very small salve to the fundamental problem.
About the author
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover
Institution at Stanford University.
Cochrane is also a Senior Fellow of the Stanford Institute for Economic Policy
Research (SIEPR), Professor of Finance and Ecoomics (by Courtesy) at Stanford
GSB, Distinguished Senior Fellow of the University of Chicago Booth School of
Business, and of the Becker-Friedman Institute, a Research Associate of the National
Bureau of Economic Research, and an Adjunct Scholar of the CATO Institute. He is
a past President and Fellow of the American Finance Association, and a Fellow of
the Econometric Society. He has been an Editor of the Journal of Political Economy,