After describing potential shapes of the U.S. recovery from the coronavirus pandemic, former Federal Reserve Bank of Atlanta President Dennis Lockhart also painted a picture of the global forces that will mold it.
Speaking virtually May 8 on “The Future of a Pandemic Economy” with World Affairs Council of Atlanta President Charles Shapiro, Mr. Lockhart theorized that cooperating with China, rather painting it as a “bad guy,” might be the better course in the short term.
“I don’t think it’s necessarily in our interests to be raising tensions with China, perhaps scapegoating China about their intentions during this pandemic, given the fact that we may very well need China in a very important way: and that is in the manufacturing of vaccines when that comes about.”
He also said that the economic downturns that shutdowns have produced, particularly in emerging-market countries that will be hit hard as capital flies to perceived safer instruments like the dollar, could exacerbate the root causes of international migration, especially if the outbreak overruns health systems in places like Africa and Latin America.
He doesn’t yet see the makings of a global financial crisis a la 2008 but called for vigilance in this time of fluidity and change. Some of those same vulnerable countries could face debt crises as commodities — which bring in the bulk of their foreign currency — see prices plummet.
“It’s a troublesome picture; it’s sort of a background story as we here in the United States experience our own economic crisis, but it is there,” Mr. Lockhart said.
Already the International Monetary Fund is floating the idea of debt relief in some countries, as well as the idea of issuance of new special drawing rights, additions to countries’ currency reserves based on a basket of international currencies.
“So far we have not seen any terribly serious outcomes that would signal the beginning of a financial crisis, but I think you have to watch the situation very carefully,” Mr. Lockhart said, noting that a financial crisis would have a “compounding effect” on all the other negative aspects of COVID-19.
The banking system in the U.S., however, enters the crisis well-capitalized and relatively healthy a decade after its former collapse. Less regulated “non-bank financial instruments” are of more concern.
Mr. Lockhart, who was instrumental in launching the council at its outset at decade ago, has always cited the need for Atlanta to keep a global view in order to understand happenings in its own backyard.
He underlined a variety of potential lasting impacts of the pandemic, including the acceleration digitization and its cascading effects: more remote work, stronger telecom investment, potentially smaller offices and therefore new ideas about corporate real estate. Airlines and hospitality could face leaner times for a prolonged period, he postulated.
Even the more extreme left-leaning proposals for rejiggering the U.S. health care system, which accounts for 17 percent of GDP, will now get a second look given the trouble the decentralized system has faced dealing with the pandemic.
“The readiness of our health care system, the resilience or the robustness of our public health system, simply hasn’t stood up to the challenge we have faced in the last few weeks, and that is reflected in the numbers at least measured by infected people and deaths on a global basis. The U.S. appears to be faring worse than lots of other places that have a different system.”
As for the U.S. monetary response, he said the “magnitude is totally called for” and suggested 2008 taught policy makers “it’s probably wiser to pull out all of your ammunition and try to blast a crisis upfront” rather than taking a gradual approach.
Despite hurdles to implementation via agencies like the SBA which weren’t designed for the purposes they find themselves filling, Mr. Lockhart said the Trump administration has done a pretty good job getting money out quickly. He also praised Fed Chair Jerome Powell, with whom he worked for five years in the past, for putting the central bank’s power to work stabilizing the economy.
In addition to speeding up its plan to lower benchmark interest rates to zero, the Fed has also begun leveraging $75 billion from the Treasury to purchase shares in exchange-traded funds investing in corporate bonds, with overall plans to add $750 billion to its balance sheet.
Mr. Powell has said more stimulus is needed, and he has dismissed the idea of venturing into negative interest rate territory, whereby depositors pay banks to hold their cash.
That situation has played out in places like Japan and Europe, and Mr. Lockhart says it’s unlikely in the U.S., though the pandemic is questioning the conventional wisdom on this as well as traditional views on how much money the government can pump into the economy without triggering inflationary pressures.
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Listen to/watch Mr. Lockhart’s Zoom interview with Mr. Shapiro here.
Learn more about World Affairs Council of Atlanta membership and upcoming programs at www.wacatlanta.org.