A five-point antidote to the financial pandemic

We don’t know how or when the coronavirus will run its course, so before it is too late, the government must keep rolling out financial programs to maintain what was a strong economy until it can return to normalcy. Time is of the essence once an economy catches fire. Every financial crisis has been triggered by one thing — a loss of confidence. Each of them was subsequently extinguished by governmental or private sector actions that rebuilt that confidence. 

Drawing on some of the best lessons of prior financial crises, my own experiences working through at least two of them and the last two years of research I have done on financial crises for an upcoming book, I believe that the government should execute the following five-point plan. 

1. Credit and Liquidity Availability

This box has largely already been checked. Between Sunday March 15 and Tuesday March 17, the Federal Reserve relaunched some of the tools it used during the 2008 financial crisis. It lowered interest rates and reserve requirements and coordinated with the Banks of Canada, England, Japan, the European Central Bank and the Swiss National Bank to shore up liquidity via the standing of U.S. dollar liquidity swap line arrangements. It also established new commercial paper, primary dealer credit and money market mutual fund liquidity facilities. That probably won’t be enough firepower to deal with the crisis.

2. Comprehensive Forbearance 

The bank regulators have begun the process of installing forbearance standards. This part of the plan must be comprehensive, meaning that it should include all of the banking agencies, the Federal Housing Finance Agency, the Securities and Exchange Commission and the Financial Accounting Standards Board. It should waive business-as-usual requirements and deal with the treatment of borrowers who are experiencing financial distress. It should temporarily absolve loans that might otherwise be classified, and identify capital and liquidity requirements that should be lowered or waived.

It should also preclude enforcement of such requirements, including a moratorium on closing banks that experience distress because of this crisis. Finally, it should include modifications of certain public and call report filing requirements for the next six months. Some of this has already been done. The comprehensiveness and clarity of this message should be continuously communicated as best that it can to the markets and the public. 

3. Creation of the Pandemic Financial Revitalization Fund

One of the most effective ways to address the pressing financial challenges that every business is facing would be to establish a Treasury and privately-financed Pandemic Revitalization Finance Corporation (PRFC). It would be a very efficient vehicle to keep businesses afloat and people employed while the virus runs its course. Much like the Reconstruction Finance Corporation (RFC) established by Congress in 1932, and the Troubled Asset Relief Program (TARP) launched in 2008, the PRFC would address the issues that companies will inevitably face when liquidity provided by the Federal Reserve is just not enough and they start running out of balance sheet net worth. It would likely eventually turn a profit, just like TARP did.

As a government corporation, the PRFC could immediately act to invest in the preferred stock of large and small companies deemed vital to maintaining maximum levels of employment and participating in the revitalization of the economy as the pandemic recedes. The PRFC’s charter should sunset in 10 years to ensure that it is only a stopgap measure. A small group of top government officials should form the board, including the secretary of the Treasury, its chair, the chairman of the Federal Reserve and the secretaries of Commerce and Labor. It would benefit from a small number of private sector appointees.

4. Business Interruption Reinsurance

The PRFC should also be enabled to provide first-dollar reinsurance to business owners around the country who likely are hearing that their business interruption insurance does not cover a pandemic. Delay and litigation over this issue would be self-defeating.  The simplest solution is for the government to reinsure the insurers that are already there, allow them to process and pay the claims and then compensate them dollar-for-dollar plus expenses. All policy business interruption exclusions should be temporarily preempted by Congress with regard to COVID-19 to allow the PRFC to step in and preform this important function.

5. Checks in the Mail

The last part of this comprehensive strategy is to communicate to every American that they are OK. The best way to do that is send them a check to let them know their government cares and is supporting them. The psychology of the moment should not be underestimated.

History tells us that delaying these solutions in the name of economic principles or dogma can be self-defeating. Principles and moral hazard can be dealt with after the crisis is overcome. This is no time to pit Main Street against Wall Street.

Thomas P. Vartanian is a former bank regulator. He is the executive director and a professor of law of the Program on Financial Regulation & Technology at George Mason University’s Antonin Scalia Law School.