Home / How to / Coronavirus: how to tackle the economic crisis | FT

Coronavirus: how to tackle the economic crisis | FT

The spread of the coronavirus, Covid-19, has been a major shock to the growth prospects of the global economy and the euro area economy The storm is upon us

The Covid-19 disease that has devastated China, Italy, and Iran is about to hit many other countries with full force But the economic damage is already here We are starting now to see the data of just how bad the economic damage is And it doesn't come just from the disease, but from the measures governments are forced to take to stop its spread They have taken draconian measures in one country after another in order to stop people from being physically near each other and from socially interacting

But this means that swaths of the economy are being shut down And we are looking now at a downturn at least as big as in the global financial crisis, and very probably quite a lot larger and deeper In response to this, policymakers have taken unprecedented actions in order to try to minimise an economic hit that we know will be big They have used both monetary policy and fiscal policy in unprecedented ways Monetary policy is what central banks do

Fiscal policy is what governments do with their budgets Yes, it will be significant But that's why we're doing everything we're doing We're doing whatever it takes to get through it And things will be better in time

I think we're going to do something that gets money to them as quickly as possible That may not be an accurate way of doing it, because obviously some people shouldn't be getting cheques for $1,000 And we'll have a pretty good idea by the end of the day what we're going to do be doing The world's central banks have done three types of things in order to reduce the economic consequences The first is to reduce interest rates in order to make things easier for borrowers to continue to borrow and to have a little bit more extra cash

Especially the Bank of England and the Federal Reserve, the central banks of the US and the UK, have put in place dramatic and very fast interest rate cuts The second thing that central banks have done is to intervene in markets, put a lot of money into financial markets in order to make sure that they function properly, and in order to make it easier for banks to continue to lend into the real economy They have also reduced, taken away some regulations, and lightened some rules, again, to make it easier for banks to lend And the third thing they have done is that they have gone on a buying spree Central banks have put a lot of money on the line in order to buy assets such as government bonds, corporate bonds, again in order to make it easier for people to borrow and finance themselves through this crisis

And that means that central bank balance sheets that were already big after the last crisis are now set to become even quite a lot bigger What about the fiscal policymakers, governments? They are also using their budgets vigorously and in unprecedented quantities in order to cushion the shock Most governments certainly in Europe are committing to subsidising the wages of people who are being laid off The intention is to prevent what is hopefully a short shock from the disease from destroying jobs and destroying companies to such an extent that when governments can lift the restrictions on movement and interaction, there are no jobs or shops or companies to go back to This will cost a lot of money

So governments are looking at increasing their debt significantly And in some cases countries that already have very large public debt burdens after the last crisis, people are somewhat worried that they will find it difficult to borrow But that's when we go back to the central bank action again When central banks buy government bonds in what is called QE – quantitative easing – or asset purchase programmes, they ensure that the borrowing costs for governments are low So the intention, at least, is to allow governments to borrow as much as they need to do whatever it takes to protect the economy as much as we can from the deepest shock in generations

Source: Youtube

About umoh

Check Also

HOW TO: Change Your Steering Wheel

– Steering wheels have been allowing us to point our majestic horseless carriages wherever we …