The Sunshine Economy: COVID-19 And The Federal Reserve
The economic consequences of efforts to slow the spread of COVID-19 are becoming clear. A half million people in Florida have filed for unemployment in just three weeks. And that’s just the people who were captured by the government data. There are others who have been turned back by the state unemployment website and its failures.
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Congress and President Donald Trump have agreed to three government stimulus packages including direct payments to most Americans, bigger unemployment checks, and loans to companies to cover payroll for two and a half months. Together the spending totals over $2.2 trillion and more is likely to come.
But the bigger money to support the economy is coming from the Federal Reserve. The central bank has launched more than 10 different strategies including cutting its target interest rate to zero. It has announced programs to buy government bonds, mortgage bonds, and corporate bonds. It has plans to lend money to buy bonds backed by credit cards, buy loans issued to smaller companies, and buy loans taken by local governments. The tab runs into the trillions of dollars and counting.
"Turbulent." That’s how the Federal Reserve’s top official in the southeastern U.S. describes the American economy one month into the national emergency brought on by COVID-19.
Raphael Bostic is the president of the Federal Reserve Bank of Atlanta. The Central Bank splits the country into regions and Florida is included in Bostic’s territory. The agency has two goals: low inflation —currently historically low —and full employment. That part of its mandate is why the Fed has taken historic actions hoping to prop up the U.S. economy.
WLRN spoke with Bostic on Thursday, April 9.
The transcript has been edited for clarity.
WLRN: More than 16 million people combined already have filed for first time unemployment in just the past month, including almost a half million in Florida. How much worse could it get?
I think that it's important to just keep in mind that this is not a typical economic disruption. Usually when we have an economic disruption, what happens is that we see froth or excessive risk being taken in in the marketplace, and that then leads to real retrenchment on the part of large parts of our economy. That's really not what's happening here.
This is a very, very specific and in many regards idiosyncratic situation that we have here. I would expect that the response coming out of this is actually not going to look like anything we've seen before, but rather is going to have its own character. I'm hopeful that if the supports that have been put in place and and are being rolled out are effective, will lead us to have a much more robust response and recovery than we might have expected if we had had our garden variety recession.
Have you been able to project how many more people may wind up unemployed, even if for a short time period?
It's very difficult to do that. And most of the models that we have from an economics perspective are based on historical experiences. We don't have that kind of history, which makes it very difficult.
With the reliance on tourism and real estate at any more heightened of a vulnerability than other metropolitan areas or the regional economies?
I think that the South Florida economy's reliance on those sectors does expose it pretty significantly to these challenges because of the nature of the transactions associated with them. I do think, though, that if we can help the businesses that are out there — the hotels, the real estate sector — continue to function as close to par as possible and provide support for workers so that they can continue to be close to where they've had their jobs, and those jobs don't fully disappear, I have some hope that we can see a good amount of recovery.
Do you think with the vulnerabilities in South Florida, because of the more exposure around tourism, hospitality and real estate, is it more at risk of falling into a prolonged recession or perhaps even something worse?
This is another one where it's kind of difficult to answer that with with a clear, definitive answer. One of the things that I've been watching very closely as we've been going through this and we've entered into this crisis period is really how are consumers responding? How are families responding and how are business leaders responding? And so much of the answer to your question will rely upon [whether] they lose confidence in going and doing things? Or will they be much more conservative and cautious in engaging in the economy and particularly in sectors where there's a lot of interaction?
Living with uncertainty is up and down the income strata. What are your thoughts on how the public health measures taken in order to address the spread of the virus expose fundamental vulnerabilities in the economy, particularly those present here in South Florida, like underemployment, pay disparities and high costs of living?
I worry about that stuff a lot. We talk about those things a lot. One of the things my staff is really working hard on right now is to try to make more people aware of the issue of resilience and see if on the other side we might be able to do some things a little differently to help people be more resilient so that they don't face those challenges where you might completely lose a house or something like that.
Access To Credit
The average South Florida company has 14 employees. This is an economy driven by small businesses. How targeted can the Federal Reserve be to help those small businesses?
First thing that we've done is really try to manage and work with our relationships with banks to tell banks that, 'Look, it's really important in this time of crisis that you reach out, engage your customers and work with them to help them get through this this difficult time as much as possible.' We've tried to change some of our regulatory calendar processes to ensure that banks are not overly burdened in terms of having to respond to examination timetables and can really focus all of their time and energy on working with customers to in customer relationships, trying to restructure loans and change their relationships so that businesses don't face that kind of stress.
We've sent a strong message that [loan] modification is done and this time will not leave banks liable and leave them in trouble six or 12 months from now. One of the things that we've heard from banks a lot, that they don't have confidence that regulators are going to remember what we are going through right now and we'll do those decisions in a less positive way.
How do companies and individuals that may not have any revenue at all right now get that credit?
I've talked to many banking institutions that have basically said, 'We're allowing you to defer payments for six months or a year so that your need to have revenues today is much more limited.' Moreover, things like the Paycheck Protection Program are designed to get capital to businesses so that they can cover their payrolls and their leases and their rents. That is another area where having credit becomes less pressing. What you're seeing through the responses by bank institutions, by the federal government and by us at the Fed, is we want to create some bridges. We want to create some pathways whereby businesses don't have to worry so much about meeting a revenue target, but rather can focus much more on trying to preserve their relationships with their employees and work to get ready, when the time, is right to emerge from this in a position where they have relative strength.
Reopening The Economy
What are the indications that you're looking for to tell you that the time is right to reopen the economy?
I think the time being right is really not for me to tell, but rather to rely upon our public health officials. They have much more expertise in knowing when the risk of infection and exposure to average citizens is sufficiently low that we're in a place to reengage the economy in a robust way.
For an economy that's dominated by tourism, trade and real estate like it is here in South Florida, what should we expect later on this year for economic activity?
If we see the public health response in Florida be robust such that there is not a concern that if by going to Florida or going on a cruise, there's going to be undue exposure, that's going to be an important marker for setting an appropriate level of expectations about what's going to happen with the economy. The questions are going to be, how is Florida doing in its response? And is the response happening in a way that is engendering confidence among those who might want to vacation there? If the answer is yes, I think South Florida could have a pretty good season. If the answer is no, then I think things could get get a bit rocky.
Are there more financial tools that the Federal Reserve has at its disposal that it has not utilized in this crisis yet?
We've used quite a bit. And I would say we are ready, if necessary, to do more.
The Federal Reserve has been very active in loan guarantees and buying loans and other kinds of lending facilities to try to backstop what's been happening. Who's on the hook if companies can't pay those loans back?
It's a combination. Almost all of the the lending that we are doing in this emergency context does have backstop from the federal government, from the taxpayers, which is one of the reasons why we're taking some time to roll these things out. We want to make sure that there's enough due diligence that's in place such that the amount of losses we might expect will be minimized.
But if losses go higher than what the backstop is, that will be a liability of the Federal Reserve and we'll have to cover that. But at this point, though, I think it is far more important that we make sure that we provide as much support as we possibly can. You know, One of the lessons that we've learned through a succession of crises is that oftentimes the extra pain that's experienced is precisely because the policymakers did not act quickly enough and did not act boldly enough. So I'd rather be criticized for being too bold and too energetic and too eager and too willing to support than have the history books write that we sat on our hands when we could have done something.