Economic data is starting to come in, and it's already setting all types of records. For a while, it seemed as if the housing crash and Great Recession, when the financial system seemed to be on the edge of collapse, would be the worst we would ever see. However, the coronavirus outbreak is making that experience look like a walk in the park. In hindsight, the problem was about plugging in the holes in the financial system which required political consensus and letting time heal the wounds.
The coronavirus situation is much scarier as the foe can only be beaten by shutting down the economy. This is an unprecedented situation. One example is jobless claims which peaked under 700,000 during the Great Recession. Last week brought more than 3 million claims, while this week saw more than 6 million claims.
One Silver Lining
One silver lining of this experience is that policymakers are acting much earlier and forcefully than the previous time. It seems they have learned some lessons from the previous experience in which massive amounts of pain was inflicted before policymakers stepped up with large enough packages to offset the damage.
While the housing market started turning south in the middle of 2016 and the economy started slowing late in 2007, Congress didn't get its act together until the fall of 2008. Even the Federal Reserve was myopically focused on inflation until the spring of 2008. By this time, most of the damage had already taken place.
This time, Congress and the Federal Reserve are acting much more aggressively and earlier. The Federal Reserve has expanded its balance sheet by nearly $2 trillion in a couple of weeks. Congress has already passed three fiscal packages.
While the fiscal packages are a net positive, they still are lacking in scale and simplicity. An example is the SBA loan program of $350 billion. The purpose of this is to give small businesses interest-free loans for the purpose of maintaining payroll. Early indications are that it's full of glitches, and many small businesses are unaware of how to take advantage of it. Currently, larger banks like Bank of America
Additionally, many smaller banks are unprepared to deal with processing and verifying these applications. Putting banks in charge of distributing loans and incentivizing them makes sense on one level, but it also creates a potential bottleneck which could be the difference between life and death for many small businesses. Banks are also confused about who would be liable if there is a default. Early reports are that banks are only making these loans to borrowers who have borrowed from them in the past. Of course, this leaves out small businesses that have not borrowed in the past who may be most vulnerable in this climate.