There Is No Option: Open The Economy Now

“This might be the most important decision of my life.” —  Donald Trump

As we wrote on March 25, governments are reluctantly coming to grips with the idea that they must soon decide between re-opening society and saving lives from the Covid-19 scourge.

The Canadian prime minister, Justin Trudeau, has suggested that losing even one Canadian to the virus is not worth any economic benefit. In the U.S., the key health advisors to president Donald Trump talk about not being able to re-start society till the virus is stopped and no lives are in danger. This humanist position enjoys the approval of the mainstream media which has turned the Covid-19 death toll into a telethon of tragedy, bereft of context and precedent.

The fact is that, however much M. Trudeau or the healthcare advocates of the World Health Authority might desire to save lives, the choice on what to do next is already pre-ordained.

They must resume the economies and normal life of their citizens. Now.

Because the media has been obsessed with hospitalizations and ventilators, few have talked about the catastrophic financial weeks and months that lie ahead unless governments strike the uncomfortable balance between deaths and the collapse of society. Re-opening society has been discussed as an abstraction, when it is, in fact, an urgent necessity.

Let’s examine a few of the financial viruses that await. Most expose the risks of the interconnectivity in the global financial markets today, where investors in Asia or Europe can buy the debts incurred in American or Canada. Where a big loan failing used to jeopardize one bank, now a series of failures can bring down the entire global financial chain.

Take consumer debt. In Canada alone consumers have racked up over $100 billion in credit-card and consumer debt. While Covid-affected Canadians are receiving about $1200/ month for the next four months, that will hardly allow consumers to pay the punishing 19 to 21 percent interest rates even on minimum payments.

Should consumers begin to default on their consumer (and student) loans this will produce a domino effect. Much of the credit-card debt resides not with the credit-card companies themselves. Large segments of that debt have been sold off into markets as collateralized debt obligations. Should too many consumers fail to make even minimum payments it will trigger the collapse of these instruments and financial markets, creating a liquidity crisis.

If all this sounds familiar it’s because we went through this same scenario in 2008 when poor mortgage investments— parcelled off to markets in the form of derivatives— collapsed the credit markets. Home buyers walked away from their mortgages in droves, resulting in the failure of banks worldwide and creating a liquidity crisis that governments scrambled to solve. It has taken almost a decade to recover.

If the people who’ve been laid off, fired or otherwise out of the job market walk away from their consumer credit obligations the 2008 playbook my not be enough. Governments already stretched by trillion-dollar rescue packages due to Covid will be expected to print ever more money to keep the markets and banks afloat. Inflation and collapse of currencies could come next.

Then there’s the housing crisis in the offing. Again, unemployed (or under-employed) home owners could be unable to meet their mortgage payments— even at today’s historically low rates. Some analysts have predicted that Canada’s big five banks could end up holding the paper on up to 50 percent of the mortgages in the country if home owners walk away due to a prolonged isolation policy. 

The shock to the lending community seen in 2008 will be repeated again as the underlying investments used by large institutions to finance the mortgage industry will collapse. Real-estate values will tumble with them. And, as home values dive, so will the accumulated equity amassed in those homes— taking homeowners’ life savings underwater with them. 

Finally, any abiding liquidity or credit problems will hit Mr. Trump where he hurts most: in the stock-market numbers he constantly brags about . A collapse of credit markets will trigger the same steep dive in stocks and mutual funds seen when the TSX dropped 35 percent in 2008.  the Dow Jones Industrial Average lost 33.8 percent in 2008. Such a drop today would result in a 9800-point drop off the DJIA’s 29,000 mark achieved last fall.

Heading into the 2020 presidential election such a tumble would be fatal to Trump’s re-election. (Trudeau was fortunate to get his new mandate last fall before the Covid crisis hit). To say nothing of the societal costs of locking people in their homes and keeping children home from school. 

So, however much elected officials want to save lives, their only play going forward is to save the economy before the Covid fallout makes 2008 look like a picnic.

Bruce Dowbiggin @dowbboy is the editor of Not The Public Broadcaster (http://www.notthepublicbroadcaster.com). He’s also a regular contributor to Sirius XM Canada Talks Ch. 167. A two-time winner of the Gemini Award as Canada's top television sports broadcaster, he is also the best-selling author of Cap In Hand which is available on BruceDowbigginBooks.ca