The best solution to curb the coronavirus economic crisis

The nation faced crises in 2001 after the terrorist attacks and in 2008 with the financial meltdown and Great Recession. But the current pandemic is producing the worst economic crisis since the Great Depression. It carries a similarity with 9/11 in that our citizenry is facing a lethal threat. As in that case, the priority is addressing the threat directly. It means a public health mission to minimize the damaging consequences of the coronavirus.

It is different from 2008 in that it is a much bigger problem, however, it is not nearly as complicated. Unlike the intertwined financial landmines that surfaced in 2008, this pandemic has brought large swaths of commerce, notably entertainment, restaurants, hospitality, and travel, to a grinding halt. Businesses that were in perfect condition one day began a financial spiral downward shortly afterward. As they laid off workers, they created the mirror problem in the household sector. All of a sudden the strongest labor market in memory was replaced by a future without a paycheck.

Businesses and households started selling everything they could to raise cash and hold on with their bills. The mass selloff has battered financial markets. The Federal Reserve has done a sterling job of minimizing the turbulence with recent actions. It dramatically raised its efforts this week, announcing an open unlimited buying spree. As the central bank made clear, the Federal Open Market Committee will now “purchase Treasury securities and agency mortgage backed securities in amounts needed to support smooth market functioning and for the effective transmission of monetary policy to broader financial conditions and the economy.”

The Federal Reserve expanded the powers of two existing programs and created two new facilities to extend credit to large employers through the purchase of corporate debt. The central bank also revived an emergency lending vehicle that was last used in the 2008 financial crisis to support many small businesses and consumers by encouraging investors to buy securitized automobile debt, student loan debt, and credit card debt.

Moreover, the Federal Reserve plans to establish a Main Street Business Lending Program “to support lending to eligible small and medium sized businesses” to complement efforts by the Small Business Administration. Unfortunately, there is a limit to what the Federal Reserve can accomplish alone, as the underlying problem remains. If the Main Street economy is allowed to deteriorate, financial markets will ultimately crumble down.

Congress needs to act and it needs to act now. In this crisis, ground zero is small and large businesses that were perfectly sound but now have no customers and no revenue. When the restaurant has to close, the bakery and the food supplier are next. The nation is seeing a cascading impact whereby one revenue stream after another keeps drying up. If this pattern continues, eventually it will mean that loans are not repaid, and the Main Street distress will take down the banks and Wall Street firms as well.

The fastest remedy would be to provide businesses with grants or loans on the condition that they do not lay anyone off. Grants and loans would keep businesses intact, while continued payroll would keep workers and their families intact. The basic task is to use the tremendous borrowing power enabled by taxpayers to raise a trillion dollars or more, then pour this cash into a variety of funnels leading to companies and households. This is simply bridge financing of otherwise sound business activity.

There has already been a lot of damage that government support for small and large businesses cannot avert. There will have to be, and indeed there has already begun, an aggressive public effort to help those who are sick, jobless, or forced to stay home to care for others in the form of paid leave, cash assistance, and unemployment insurance. But relying on those types of transfers alone will allow the coronavirus crisis to shatter the economic infrastructure and make the road to recovery much slower and longer.

Grants and loans are often scorned as bailouts. But these are not bailouts for bad behavior. Unlike the financial crisis, the coronavirus recession is not the price of poor practices. Grants and loans are simply the fastest and most effective way to help the families of the highest concern.

Douglas Holtz-Eakin is president of the American Action Forum. He served as the director of the Congressional Budget Office under President Bush.