Teddy Fusaro is the chief operating officer at Bitwise Asset Management, a cryptocurrency asset management firm in San Francisco. He has held management and leadership positions at alternative asset management companies for the past decade, and began his career at Goldman Sachs.
As America battles the invisible enemy of the novel coronavirus (COVID-19), an exponentially growing silent killer, we find ourselves in a situation that is unprecedented in scale, in danger to our fellow citizens, and in the economic destruction and financial shock it is already causing.
To battle this invisible enemy we need to understand that we are facing three distinct threats. All three require different policy tools and coordinated actions, and those actions must be taken at “wartime scale.” Each of the three require an unparalleled, full-scale, American war effort; without that effort, we will not win and will not emerge as the world’s superpower that we are today.
I believe America is equal to the task, and that this can prove to be our finest hour. But we must change now and do more, faster.
The three different threats – the three-headed monster we are battling – are intertwined and entangled, much as our modern world is.
First, and most dire, is the public health crisis, which will infect and kill increasing numbers of Americans and overwhelm our hospital systems and medical care professionals, our heroes on the frontlines of this battle. It will be particularly deadly for our older and already-ill friends, neighbors and family. We have data from China (though questionable), South Korea, Italy, Iran, Europe and now the U.S. that gives a clear sense of what we are facing, and it can’t be ignored. In this war, our doctors, nurses and health care clinicians should be thought of as our soldiers marching to the front. We must do all that we can to arm them and protect them.
The second is an economic crisis, the severity and speed of which we have never seen, not even in the Great Depression during the 1930s. Goldman Sachs estimated that more than two million Americans would file for unemployment benefits last week. During the Great Financial Crisis of 2008, the highest weekly level was less than a quarter of that figure. Prior recessions have been slowdowns in economic activity relatively speaking. This is not that – it is a sudden halt. And it must be offset by an equal and opposite force.
The third emergency is a financial crisis that has permeated the financial system as markets respond to the disruptions caused by the first two, with asset values declining rapidly and liquidity becoming discontinuous and disjointed in key arteries that allow for modern commerce. The financial crisis must be stemmed so we have the circulatory system to fight the first two.
Much as America failed to win the first battle of this war – through its inability to properly test for the virus at scale in the way that South Korea did – we are now running the risk of compounding our errors through the inability to diagnose the magnitude of each issue.
On the first issue, America simply does not have the option to back away from the quarantines, isolations and social distancing measures that have been rolled out over the past ten days. The only way to slow the spread of the virus and to protect those who will otherwise die from sickness is to reduce the number of those who become infected, and the only way we can do that is through quarantine, isolation and social distancing.
Otherwise, as we have seen in Italy and in Iran, the health care system will simply be overrun, like a cup held beneath a running faucet (some amount of this will happen in America already given our slow start, but we must do what we can to limit the loss of life). This not only kills more people – at a scale not seen since the Pandemic Flu of 1918. It also endangers our heroes, the doctors, nurses and medical professionals who will try to save as many lives as they can.
Green zones and red zones
America must close the borders of highly contagious clusters (New York, Washington state and likely others) to prevent those “red zones” (areas with high levels of infection) from exporting the virus to relatively healthy parts of the nation (“green zones”). Green zones (areas with relatively low community spread) can re-engage in economic activity substantially sooner than red zones, but if we continue to allow travel between regions, we won’t have any green zones to protect and no economic activity to turn back on. This is the technique that worked in Wuhan, China, where the virus is believed to have originated in the waning months of 2019.
We must aggressively and immediately – at never-before-seen scale – pour resources into testing, medical supply and equipment production, and the pursuit of the cure. Silicon Valley and corporate America are working on treatments and are champing at the bit to do more, faster. The Trump Administration should appoint a rapid-response tsar now to oversee engagement with our private sector and coordinate this part of the response.
Now is the time to immediately suspend regulation (“red tape”), and allow researchers and business to test solutions like never before. The government should directly fund new companies by taking equity stakes in startups that are building companies to solve these problems. The government can take these positions in startups by establishing a Sovereign Wealth Fund that can serve multiple other purposes as we defeat this three-headed-beast (more on that later).
Without testing we will not see our invisible enemy; without producing new medical equipment and supplies, we will not protect those on the front lines who need our support the most; and without a cure, we will not emerge on the other side. This is the time to invest in all at massive scale.
The second issue, our severe economic crisis, is born from the first: the quarantines and shutdowns required to limit the spread of the disease are creating “economic sudden stops” the likes of which we have never seen. Economic activity has ground to a halt and will remain halted until we can increase testing to identify the sickness and find the “green zones” where activity can commence. Until then, economic life has ceased to exist.
As an example, consider the local neighborhood bar. The bar is closed, which means the bartender will no longer make her weekly wage. She needs money to eat and to pay rent and to buy basic medical treatments. Meanwhile, the bar owner has no income, so cannot pay rent to the landlord. The landlord may own multiple buildings but all those buildings are now closed, so cannot pay her mortgage.
Because the landlord cannot pay the mortgage, the lender will not get paid and must write down the value of the loan. The lender is interconnected to the rest of the system, which creates contagion in the financial markets. This is happening across America, in different forms, at an incredible rate, and we must respond at each level to support the individuals first and then the connected and related businesses, so they can survive and there is a job for the bartender to return to when we get through.
Here, America must fight the economic battle with all of the tools at its disposal, and those tools will come through fiscal policy designed by the White House and Treasury and passed legislatively through Congress. It must be the largest fiscal package we have ever seen. An economy worth roughly $23 trillion that is stopped for a quarter has approximately $6 trillion of activity that needs to be replaced.
Because of the unique features of this economic crisis, we must respond with unique tools. We cannot use the same tools we have used in the past, and we cannot underestimate the size of the looming disaster.
The $6 trillion must be funded by expanding the federal deficit to levels not before considered acceptable, or merely instructed the Treasury to mint new money under its existing legal authority. If Americans do not have cash, bread lines will form and social unrest will ensue.
We must first take care of those in our society who need help the most. In our example above, it isn’t just the bartender who needs money, fast, it’s the servers, the dishwashers, restaurant cleaners and all the others who keep the establishment running. All of them need money fast. We must get it to them and then ensure the landlord can pay the mortgage so the lender doesn’t fail.
Depending on our ability to pull out of the economic cycle, which may descend to Depression level depths if we do not act fast, we may need large-scale public works programs like President Franklin Roosevelt’s in the 1930s, which built much of our aging infrastructure that still exists today.
The third crisis that must be contained is the financial crisis. The Federal Reserve thus far is the American institution that has responded most exigently during this crisis. We should be proud of the actions the Fed has taken, but we should also understand it will need to do more. The American financial system, built around the dollar, is the circulatory system of not just one country but the world. If our system stops other economic activity will cease, and financial contagion will bleed over into the real economy, compounding the economic crisis and impairing our ability to resolve crisis one and two.
The financial system needs to survive so we can make it through this war, and so economic activity can commence in earnest once we get through to the other side. Financial failure must be held at bay, and the Fed has acted heroically over the past two weeks to stave off disaster. And despite what some think, it still does have more tools at its disposal. And eventually it will need to use them.
That includes open-ended quantitative easing of all asset types, outright purchases of municipal debt and negative interest rate policy. Those who are skeptical of this need look no further than the measures taken in the past decade by Japan’s central bank . The Fed must lend to the entire world to keep the existing global financial system alive. It has already done so by slashing rates, establishing commercial paper support facilities, increasing its repurchase programs, opening swap lines to foreign central banks and re-establishing quantitative easing. But it cannot act alone forever.
Unlike the Great Financial Crisis of 2008, when American banks were part of the problem, during this crisis American banks are part of the solution. They are well capitalized, well managed and ready for war. We must lean on them to get more money into our ailing corporations and continue to keep the system working. Easing Wall Street’s capital requirements, so institutions can lend more and take more risk is part of the solution. But we must also use them to get money from the Fed circulating in the system and to help establish equity stakes in firms that should be kept solvent until the storm is done. And the Fed must keep them liquid as they help to pull us through.
We’ll also need financial solutions for our ailing corporations. That will inevitably raise questions of moral hazard, who is held accountable for balance sheet management, compensation programs, stock buybacks and how taxpayers are made whole eventually. Those questions are important and should be answered, and they should be answered in ways that are more satisfying than they were after the Great Financial Crisis. But we cannot allow any large companies to fail, because the system in its fragile state cannot handle such additional shocks. Unlike the last crisis, this one was not caused by fraud, theft or mismanagement directly. It was caused by a novel pathogen that arrived in the world four months ago.
Establishing a U.S. sovereign wealth fund to buy assets and take stakes in companies that need immediate aid (particularly struggling airline, hotel, and travel companies – but this list will expand fast) could be part of the solution. It can buy assets others will not and create a financial juggernaut that can return massive financial gains to Americans over time. This will increase American financial strength when we exit the crisis, and is a sensible way for the government to take ownership stakes in public and private companies.
Each of these proposals is obviously and clearly incomplete. But what is important is we understand the severity of the situation, the intertwined nature of all three problems and emphasize speed, size and a “bias towards action” to stem the crises before us.
The U.S. president should draft experts from the private sector into government service to administer these programs. Our best and brightest will happily serve but he would have the authority to effectively force participation through the Defense Production Act.
While America was slow to respond to the crisis we are now at risk of compounding that error, and the situation in each instance will get worse before it gets better even if we do act as fast as we can.
But American ingenuity and strength can and must rise to the occasion. During World War II, life changed dramatically and in many ways as Americans at home supported the “war effort” – volunteering, participating in government-managed food and product rationing, submitting to price controls, entering public service to help in a variety of ways, and generally leaning into a national spirit of agreement, pride and will to win.
America still retains that winning spirit, and must channel it now to defeat this enemy. Instead of wallowing in defeat from loss in the first battle or fear that we may not emerge, we must make this our finest hour. As Roosevelt said in his inaugural address in 1933, “This great nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”