Donald Trump has delivered for the voters that elected him — and many who didn’t. With the aid of an epidemic, he has forced the Washington establishment to act quickly for the benefit of ordinary working folks through the Federal Reserve and stimulus package.
The Founders intended the president to be a leader and executive, not a sovereign. To prod Congress — where they placed the power to tax, spend and borrow for public purposes — to cut deals that balance competing regional and sectarian interests.
COVID-19 initially created a terrible supply-side shock to the economy — a shortage of components for U.S. factories and products for store shelves from China and shutdown of businesses in New York, California and many other states — and then a classic Keynesian depression — the collapse of spending as Americans sheltered in place.
A depression is a recession from which the economy cannot naturally recover. An economic contraction where the traditional tools of monetary policy — interest rate cuts and purchases of Treasuries and mortgage-backed securities — and fiscal policy — a simple tax cut and additional government spending — won’t help enough to get the economy growing again.
Morgan Stanley and the St. Louis Federal Reserve estimate unemployment will jump 13 percent to 30 percent in the second quarter. If the Coronavirus persists through June, a 20-point increase would likely cut $5 trillion from GDP by summer. That’s a collapse rivalling the Great Depression.
Many large corporations and small businesses don’t have enough cash to tide them over and without lines of credit, those will collapse and permanently unemploy millions. We can’t expect banks to risk loans and investors to purchase bonds necessary to tide those over.
After cutting interest rates to near zero and purchasing massive amounts of bonds — throwing the proverbial kitchen sink to no likely avail — Mr. Trump finally got Jerome Powell to think outside the box — the playbook prescribed by hide-bound economists and western central bankers.
The Fed is becoming a private asset manager and investment banker — buying and underwriting corporate, state and municipal bonds, credit card debt and auto loans — and a private commercial bank—lending directly to corporations and small businesses.
It will need agents on Wall Street and at local banks to execute all this. The Fed has no loan officers at its Constitution Avenue headquarters or regional branches, but its balance sheet will not shoulder the risks.
Mr. Powell has expropriated private financiers’ bathtubs to prop up cash strapped businesses. And horrors, through the stimulus package the Treasury is providing the Fed $454 billion to cover losses.
The stimulus package also provides one-time direct cash payments from the IRS to households with incomes up to 198,000, temporary weekly supplemental unemployment insurance payments of $600 to ordinary state benefits, unemployment benefits to private contractors and gig workers, and other loans and grants through the Small Business Administration and Treasury to businesses small and large riveted by the collapse of economic activity.
The usual congressional factions that block everything — liberals that decry bailouts for business and conservatives who are repulsed by payments that could discourage the unemployed from looking for jobs — were simply out maneuvered. That’s a good thing — if businesses collapse, the ordinary folks liberals champion would be thrown into the abyss and in many places, little work is to be found for the next few months.