The Daily - Why This Recession Will Be Different

Episode Date: March 16, 2020

In past financial crises, central banks across the world developed a time-tested tool kit to rescue national economies. So why don’t previous interventions seem to be working this time? Guest: Peter S. Goodman, who writes about the economy for The New York Times. For more information on today’s episode, visit nytimes.com/thedaily. Background reading: The Federal Reserve cut interest rates to near zero and said it would buy hundreds of billions of dollars in U.S. government debt, moves reminiscent of its actions during the 2008 financial crisis.The coronavirus is upending life as we know it — and news is changing rapidly. Here are the latest updates on school closings, travel restrictions and governmental directives.

From The New York Times, I'm Michael Barbaro. This is The Daily. Today, central banks across the world have developed a time-tested set of tools to rescue their economies in the middle of a crisis. Peter Goodman on why this time none of those tools seem to be working. It's Monday, March 16th.

Okay, let's hug. But first, there, you guys come up. Dad, I found... So Michael's the host of The Daily. And I've known Michael for like, I don't know, 20 years. Can I put Michael on speaker now or no? Yeah, I just put him on speaker. Okay. Can you guys hear each other? I think so.

Can you two hear me? No, I can hear. Oh, I can hear, I can hear. Hi. Can I ask you to tell me both your names? My name is Mila. My name is Leo. Hi.

Nice to meet you two. Nice to meet you. Can you two tell me a little about your day? I understand that you were not in school. There was no school today because someone, a parent at our school had the coronavirus. Oh, wow. So school was canceled. But then we got to have a little like screen time.

And then. Oh, you got screen time. Yeah. And then we went out to playground for the whole afternoon. So I want to ask you guys a question. What do you know about the coronavirus? Well, I know that, I mean, it's a virus and it started in China. And then now it's in lots of places like England, Italy, well, China, obviously.

Then it's also in Japan, Korea. Yeah. And what about the stock market? Do you know what is happening in the stock market because of the coronavirus? The what? And do you know what the stock market is? No. No. Well, that is why

we want to talk to your father, Peter Goodman. So do you think I could speak to him now? Yeah. Yeah. Okay. Thanks, you guys. Hey, Peter him now? Yeah. Yeah. Okay. Thanks, you guys. Hey, Peter. Hey, Michael.

You have adorable children. Thank you very much. And they have a very significant understanding of the coronavirus, a little less so the stock market. Yeah. Well, you know, I don't have them manage my portfolio just yet. Okay. So, Peter, let's start with what happened on Thursday morning. Welcome back. The markets just opened now down 1,642 points. Wow.

Well, what happened on Thursday morning was the markets opened. Trading was open for about five minutes. And you can see down almost 2,000 points in that amount of time. And immediately plummeted by 7%. There's the circuit breaker, 25, 49, 48, and the bell. So we'll wait here. We'll suspend trading for 15 minutes. Oh, we got 15 minutes. We'll suspend trading for 15 minutes. Oh, we got 15 minutes. We'll see what happens after that.

Which trips a so-called circuit breaker that stops trading. Now, let me tell you how big 7% is. On a normal day, in a normal time of trading, a 1% move is significant. That tells you that something significant has happened either on the upside or the downside. We will see 2% and even 3% moves, but that's a very big deal. Through this recent period of panic, we've seen 4% and 5% moves, which have dominated headlines. That's told us that there's serious agitation in the market. We know that Asian markets have sold off dramatically. We know that European markets have sold off dramatically. We know that European markets have sold off dramatically. And New York opens and immediately straight down 7%.

There's fear in the market. By the end of the day, stocks were down by roughly 10% in New York, 5% plus across Europe. And it was the worst wealth destruction in one single day since 1987. It was worse than anything we saw in the dot-com bubble. Wow. It was worse than any day we saw during the global financial crisis of 2008 and 2009. So tell me about that fear that you're describing. What did we learn from the Thursday morning crash in the markets?

We learned that things were even worse than we thought. And we learned that the usual tools that are used in a time of an economic shock are basically inoperative in this crisis. And Peter, why would that be? Why would the tools that we have used for decades in financial crises not apply here? Well, how much time have you got? 25 minutes. So I think it's useful to think about the unfolding pandemic in three stages. And the first stage, of course, is in central China, in the city of Wuhan in Hubei province, which is known as something like China's Detroit.

There's a lot of auto factories there, auto parts factories, a lot of electronics are made there. It's a major industrial hub. And it's in early January that it becomes clear that Wuhan has got a major problem and is really shut down. And so economists wake up to the reality that this is going to be an economic shock. China is the source of roughly one-third of all growth in the global economy. It's such a significant part of the world economy that if China is having a tough time, the world is having a tough time. But at this point in January,

a tough time. The world is having a tough time. But at this point in January, we're hearing that we can expect disruption to the so-called global supply chain. All of these factories in Wuhan and the surrounding areas are shut down. Eventually, factories are shut down in places like Shanghai, Guangdong, major industrial areas. And the world is braced to discover that electronics, auto parts, plastic, I mean, all sorts of piece parts of industry that are exported around the world and put into finished products are likely going to be short. And then some very large companies like Apple Computer, which makes lots of their products in China and also sells a lot of their products in China, they start warning that sales are going to disappoint for the first quarter of the year. They warn that they may have difficulty getting their goods made. General

Motors, which now sells more cars in China than in the United States, it's clear that their earnings are potentially troubled. And then the shortage of parts begins to ripple out at first just in Asia. So Hyundai, the major Korean automaker, has to shut down auto production at their factories in South Korea as they're unable to get parts that are made in Chinese factories. Same thing happens to Nissan at their plant in Japan. But at this point, it's clear that this is a significant story because China is so significant that any slowdown in China is going to ripple through the region. But there's still this sense that people who are worried about the economic impacts are saying, yeah, this is going to be bad for a few months.

And then we will see fairly rapid recovery because if Apple can't make your iPad in January, they'll make it in April when people can safely get back to work. So the conventional wisdom is this is going to be bad for China. It's potentially going to be bad for the global supply chain, but then everything will snap back. But that changes in the middle of February when suddenly there are significant numbers of cases in Italy. And that's when we entered the second stage of this economic crisis connected to the spread of this virus. And what defines the second stage? Well, we learn that it's a lot bigger than China.

Well, we learn that it's a lot bigger than China. Italy's government has overnight announced a massive shutdown across the country as it struggles to cope with coronavirus. Officials in Italy now say that five people have died from the virus there. The number of cases in that country has risen to 219 very quickly. Now we learn that there are significant numbers of cases in Italy, and they are shutting down a significant part of Italian industry. About 16 million people in northern Italy will be placed under a travel ban for a month. It's the toughest attempt to contain the virus outside of China, and the first time such a measure has been taken in Europe in centuries.

This is the industrial heartland of Italy. in Europe in centuries. This is the industrial heartland of Italy. It's responsible for about 40% of the country's annual economic output. There are a lot of auto parts factories there, and a lot of multinational companies with factories both in China and Italy had been ramping up production in Italy to try to compensate for shortages in China, and now they have to shut down. to try to compensate for shortages in China, and now they have to shut down. So interestingly, Peter, this virus seems to first hit the Detroit of China and then basically the Detroit of Italy. Two major centers of manufacturing are basically being shut down. These are two economic centers, and as economic centers, you have lots of people coming and going through these places.

So as the epidemic starts spreading rapidly in Italy, it's both a signal that the global economic effects are much bigger than we initially feared, but also the public health crisis is bigger. If there are lots of cases growing dramatically in Europe, and these are democracies, so the sorts of draconian measures that were used quite effectively to choke off the spread of the virus in China, that's not going to work in Italy. That's probably not going to work in France or Spain or Portugal or the UK. So the markets absorb the fact that this is not a China story, which was already enough to spook markets. This is a global story. And that's when the markets start to get very volatile. The markets are now dealing with the fact that there are lots of things that they don't know. And the imagination is now going to dark places. And just to practically explain what's happening in these moments when the stock market is plunging and then recovering and then plunging as the coronavirus

is spreading, people are just starting to sell stocks in all the companies that have operations in these countries or that they fear might be impacted by problems in those countries. Is that right? Well, the companies that are most directly on the line, they're suffering the most. So, you know, autos, airlines, of course, because flights are being shut down, hotels, leisure restaurants. I mean, these sorts of companies are seeing their stock values go down. But as Italy gets worse and as the global supply chain becomes a story and as everybody gets nervous about the extent of what we now describe as a pandemic, markets move into a phase where they just, investors want to get rid of anything that looks risky. They want to sell all stocks and they want to take their money and put it into a sure thing. And the entire stock market begins to look like a dangerous place to be.

Which brings us to stage three of this crisis. Exactly. We'll be right back. Well, economic fears over the coronavirus outbreak are manifesting into action. Yesterday, the Federal Reserve slashed interest rates by half a percentage point on Tuesday. It's all an attempt to give the U.S. economy a shot in the arm. So, Peter, what does stage three of this crisis look like? The first thing that happens is the U.S. Federal Reserve, this is the central bank, steps in in early March

and they cut interest rates pretty dramatically. It was also an unscheduled cut. So they have a meeting in two weeks, but they felt it was necessary to act now. This is an emergency action to encourage commercial activity, to borrow money, to spend money, to invest, to make the economy move. And that's supposed to provide some relief. Stock markets love it when interest rates go down. Right.

Only in this case, it doesn't work out like that. Why not? So initially, markets respond the way they're supposed to. I mean, investors on cue say, aha, the Fed has lowered rates. That's good news for stocks. People are going to buy, so they buy. And then very soon thereafter. A volatile session on Wall Street today.

The markets were down, then they were up, then they were down again. So let's take a look. The markets plunge again. 793 points lower on the Dow today after the Fed cut rates this morning because of the coronavirus. And Peter, why would that be? Why would cutting interest rates, which is a time-tested financial solution in a crisis, not work here? Why were investors, as you said, seeing through it as ineffective? Because this crisis is unusual. Now, it's useful to think about the economy in terms

of the demand side and the supply side. Yeah, explain. Yeah. So let's pretend that the entire global economy is a big shopping mall. Right. The supply side is all the stuff that ends up in the shops at the mall. The demand side is you. You show up at the mall, you're interested in buying a new iPad, maybe you need a new pair of running shoes, whatever. How flush are you feeling? That's the amount of demand in the economy. Well, the central bank and the traditional economic playbook can deal with the demand side. It can put more money in your pocket, maybe through a tax cut, maybe through a lowering of interest rate, which makes you feel better about running up a credit card balance or financing in some fashion. So it can put you in the mood to go spend more. It can boost demand. The traditional playbook can't do much, if at all, about a supply shock.

And what we have now is a supply shock. We have a situation where the iPads aren't showing up at the mall because the factories in China are shut down and they're not making them. There aren't flights that are connecting China to the rest of the world. Truck drivers are afraid to haul their freight across borders because they're worried about getting sick. So the Fed can drop interest rates all at once, and it doesn't touch that supply side problem. Moreover, there is on top of this a significant demand side problem. You may not want to go to the mall, even if you are flush, even if there is an interest rate cut, even if there is a targeted tax cut that encourages you to go shop. And you know what? The government

probably doesn't want you to go right now either, because policy is mostly properly centered on how do we prevent people from contracting a lethal virus. So that means that this traditional playbook of central banks dropping interest rates, governments using their budgetary power to spend money in a way where they try to spur economic activity, most of that stuff just doesn't work in this situation. And that's what the markets have been discovering. And it's filled them with fear. It's given them a sense that companies are being hit by this pandemic. It's going to hurt their earnings. It's going to make stock values go down. And there just isn't much that the authorities can do about that.

So normally when the Federal Reserve Bank cuts interest rates or Congress cuts taxes or the White House pumps money into the economy, it puts cash into people's pockets. But if there's less to buy and people don't even want to leave their houses to go buy those things, then having more money in your pocket, it doesn't really solve the problem. That's right. What the Fed is essentially doing is knowing that their tools don't really work, they're using whatever tools they've got. They're giving us a demonstration of their willingness to jump in and do something extraordinary. And the market's divine from that, that the Fed is really worried, that things are worse than we thought, that, sorry to use another metaphor,

it's as if the Fed is saying the world's on fire, except the traders see that the fire department doesn't have any water. And this is a realization that is not restricted to the United States. The Bank of England drops rates the following week. Significantly, the European Central Bank steps up their bond purchases a couple of days after that, which is a way of driving down interest rates. And in both of those cases, stock markets globally plummet. And it becomes abundantly clear that investors are concluding that all of this action is just revealing the impotence of the tools in this particular instance. So, Peter, does that mean that we're basically kind of stuck right now, economically speaking, through this pandemic?

Or are there things that governments in the US and Europe and Asia can do to try to basically stabilize the economy for the next few weeks and months? Well, it's going to be very difficult for governments to stabilize the economy, but there are lots of things that governments can and should be doing to diminish the pain for the people who are caught in harm's way. I mean, people are losing their jobs. Companies are going to fail. There's going to be a lot of economic pain and people are going to have a hard time paying their bills. That's the time where governments step in with things like this expanded sick pay policy that's being discussed in the States and in Europe and in the UK so that when people can't get to their jobs, they don't find themselves without paychecks. This is a time for expanded unemployment

benefits. This is a time to boost healthcare systems so that we have the capacity to treat people. The problem is that while all that stuff should happen and some of it is happening, it doesn't address the fundamental reality that this crisis is beyond the traditional tools that we have at our disposal to tame an economic crisis. This is a public health emergency. People are dying. Policy is appropriately focused on limiting the spread of this virus, which, by the way, is what's best for the global economy. The global economy is going to continue to feel pressures to see businesses in trouble so long as there is legitimate fear about the spread of this pandemic.

There's no getting around the fact that the only way to try to limit the spread of the virus is to do further damage to the economy. When we cancel trade shows, when we close schools, when we tell people to stay in their homes, when we frighten people by telling them that they should not go to restaurants or bars or movie theaters or see concerts, and we ban public gatherings. We limit spending. We shrink the size of the economy. And that's what's happening.

That's appropriate because if we don't do that, this pandemic is going to kill a lot of people and do economic harm. So the only way to deal with the threat to the economy is to get our arms around the pandemic. And the only way to do that is to accept that we're inflicting more harm on the economy. Peter, thank you. Thank you. On Sunday night, the Federal Reserve cut interest rates to near zero and said it would spend hundreds of billions of dollars to stem the economic damage from the pandemic.

In a statement, its leader said, The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses. But the impact of those actions remains uncertain. Over the weekend, a growing number of local and federal officials in the U.S. and across the world advised citizens to stay home and avoid public places, grinding economic activity in multiple industries to a near halt. We'll be right back. Here's what else you need to know today. Over the weekend, the United States expanded its travel ban to the United Kingdom and Ireland, expanded its travel ban to the United Kingdom and Ireland, barring citizens of both countries from traveling to the United States to avoid spreading the coronavirus. That ban now applies

to 28 different European countries. Meanwhile, to assess the health of those entering the U.S. from Europe, the Trump administration imposed new screening measures, creating chaotic scenes at multiple airports, where wait times for the screenings lasted up to eight hours. In Europe, France and Spain ordered much of their countries shut down. Spain instructed all residents to remain indoors, with few exceptions, while France closed all restaurants, cafes, and non-essential businesses. As of Sunday, the coronavirus has infected nearly 160,000 people worldwide and killed about 6,000. And.

This is something that is of great consequence. This is like a war. And in a war, you do whatever is needed to be done to take care of your people. During Sunday night's Democratic debate, hosted by CNN and Univision, both Joe Biden and Bernie Sanders attacked President Trump's handling of the coronavirus as inadequate and said they would call on the military to help contain the disease. The vice president just mentioned war. Would you deploy the U.S. military in effort to contain the virus? And if so, how?

Well, I think we use all of the tools that make sense. And if using the National Guard, which is folks, I think, in New York State already using the National Guard, that is something that has to be done. The debate was held without a studio audience to minimize the risk of transmission. And the candidates avoided a customary handshake as they walked on stage, bumping elbows instead. as they walked on stage, bumping elbows instead. The next primaries will be held tomorrow in states including Florida, Arizona, and Ohio. That's it for today.

I'm Michael Babarro. See you tomorrow.