We're On The Verge Of The Deepest Recession Of Our Lifetimes-- Are The Hack Politicians We've Elected To Serve As Our Leaders Up To The Task?

Stock markets reacted badly to the Fed's panicky decision to lower U.S. interest rates to zero over the weekend, due, at least in part, to Trump's blustering, threatening, hysterical demands that they do something to save his collapsing presidency. (Too late for that.) Trading was halted immediately after the opening bell yesterday when the Dow Jones crashed by 2,250 points (9.71%). Even before the crash the Financial Times' Rana Foroohar had written a piece, How coronavirus became a corporate credit run, warning that the Fed and other central bankers "are going to have to keep the money taps on."

It was only hours after U.S. president Donald Trump told us, in an address from the Oval Office last week, "this is not a financial crisis," when markets began acting very much as though it was.

Investors dumped assets resulting in the worst trading day since 1987. Bond markets seized up, putting pressure on banks, and the U.S. Federal Reserve swooped in with yet more emergency funding for short-term borrowing markets (known as repurchasing or repo markets), a tactic which suggests we may see quantitative easing to infinity-- and beyond.

So when exactly does a coronavirus-triggered corporate market meltdown officially turn into a full-blown financial crisis? That's a question many market participants, and banks in particular, must be asking themselves.

If there has been any silver lining to the current market shock and the recession that is likely to follow, it is that it hasn't been a 2008-style banking crisis-- of the kind that jumps like a virus between highly leveraged global financial institutions and causes them to bleed dry. The Dodd-Frank and Basel III regulations that followed in the wake of the subprime crisis were designed to mitigate that risk. Banks, required to hold larger quantities of high-quality assets, were made to do less trading, and more traditional lending.

That worked, up to a point. The virus-induced brake on consumer activity and labour markets, which has in turn triggered a corporate credit run, is what caused the market panic this time, rather than risky trading on the part of global banks.

Today, it is not Wall Street financial institutions, but companies in a variety of industries that are stressed, as a simultaneous supply and demand shock means they need to tap credit lines to pay their bills. With flights halted, supply chains disrupted and the consumer economy gutted, companies are trying to stockpile cash, whether they need it immediately or not.

It's one thing for the aircraft manufacturer Boeing to draw down its entire $13.8bn credit line. It's another for multiple big corporations to draw theirs at the same time. Still, as a recent Credit Suisse report pointed out, "we now have a global banking system where all major banks have to pre-fund 30-day outflows" with high-quality liquid asset portfolios. This is one important reason why these corporate funding stresses haven't caused a real time banking crisis in the way that the 2008 subprime crisis did. Another reason is that the Fed is backstopping the banking system with its repo operations, as banks exchange Treasury bills for cash.

All of this underscores a fundamental truth-- regulators usually tend to fight the last war. The dollar deposits that corporations are currently drawing down are one of the highest-quality types of funding for banks, the same kind that the Basel III rules stipulate they should keep on hand.

Nobody assumed that a pandemic would result in huge credit drawdowns by many companies all at once. Losing these deposits so quickly threatens the liquidity profile and regulatory compliance of banks themselves. And that is before we start to see the spike in corporate downgrades and defaults that will create even more funding pressure.

The fact is that the banking system has already been pulled into the corporate credit crisis that many people predicted would be the cause of the next big market downturn. It's all too easy to see how the problems of individual companies-- technology firms, retailers, airlines and insurance companies-- could be passed to individual banks and then to countrywide banking systems. Ultimately, they could spread throughout the global financial system, leaving central bankers once again the lender of last resort, standing between us and another global financial crisis.

That is pretty much what is already happening, and we haven't even seen the next phase of falling dominoes-- the meltdown of passive and algorithmic investing, the unwinding of exchange traded funds, and the sale of even the highest quality assets by people who are desperate to raise cash in the midst of a liquidity crisis. All this means that central bankers will have to keep the money taps on, and probably increase the variety of assets that they are buying or backstopping.

We shouldn't mistake all that easy money for a cure. As Credit Suisse managing director Zoltan Pozsar points out, "QE isn't a vaccine for this outbreak." Even if the Fed can offset pressures within the banking system, that doesn't replace the loss of private-sector spending. What's needed is something more akin to a wartime fiscal stimulus programme, in which the government replaces lost consumer demand, ideally with a major public health spending programme. We might start by bolstering the number of available hospital beds in the U.S., which is woefully behind other developed countries. Sadly, the only wartime reference in Mr Trump's ill-advised speech was to the U.S. "fighting a foreign virus."

Covid-19 is, of course, an equal opportunity pandemic. Being asymptomatic doesn't mean you aren't contagious. The corporate crisis roiling the markets has already infected the banking system.

Whether unlimited central bank injections of liquidity are enough to keep it healthy over the next few weeks and months, as both the pandemic and the market crisis plays out, remains to be seen.

Goliath: The Hundred Year War Between Monopoly Power and Democracy, author Matt Stoller tried making sensing of this for his Twitter followers with a tweet storm I've put in narrative form below. Earlier, after reading the Financial Times piece he had written that "It's clear that a massive Coronavirus Bailout is coming. As Rana Foroohar noted there's significant corporate debt distress. What is the shape of that bailout? What kinds of conditions will the government put on corporate handouts?"

We are going to bail out big corporations not just because of the virus but because Wall Street thinned out their ability to handle risk. That's what the buybacks, mergers, etc were all about. Stripping out resiliency. If we're going to inject public money let's stop that.

There should be five restrictions on any bailout terms. One, no bailouts for shareholders. Two, no stock buybacks. Three, strict exec comp limits. Four, no more lobbying. Five, no mergers or acquisitions for five years.

During the immediate viral transmission period, we may need to hit pause on any corporate bankruptcies and extend an emergency debtor-in-possession financing, which is basically loans to companies in bankruptcy to keep them functioning. After that period, there will be a bunch of corporations on the hook to the government. That's when the restructuring to put these corporations through a quick resolution process should happen.

I have not thought through what it means to cram down equity holders when private equity predators own lots of the debt, so it's critical to put real constraints on the kind of corporate control debt holders get out of the process. No financialization and asset stripping.

Same terms should not apply to small and medium sized businesses, because they have not been subjected to the same load 'em up with debt style financial games. Financialization and private equity is about loading up corporations with hidden risk. We cannot afford that anymore.

Last point. I'm hearing Wall Street analysts talk about how this market downturn is a tremendous buying opportunity. That was true in 2008-2009, and the taxpayers financed it but didn't benefit.

If it's public money doing the buying, let's use our leverage this time.

The other day we made a big point-- as did some of her colleagues-- that Orange County Rep, Katie Porter is one of the sharpest members Congress. Luckily for all of us, she's putting her brain-power behind trying to ameliorate the catastrophe Trump has bumbled into with his non-response to the COVID-19 pandemic, currently overwhelming not just medical treatment centers but financial markets as well. "Many American families are already financially insecure," she said in a quick interview. "We see that in data on 20% of people delaying treatment for a serious medical condition and the estimated 40% of households that could pay deal with a $400 unexpected expense without borrowing. The coronavirus pandemic preys not just on the health of Americans but on their financial wellbeing. Closed schools impose new childcare costs; shuttered businesses mean lost wages. We need to put money immediately (within the next week) into the hands of American workers. I support a $1,000 per worker now, with the potential of more to come as necessary. Note: Mitt Romney supports this too! While many Democratic colleagues are identifying problems with constituents such as concern about utility shut offs or inability to pay rent, the reality is the households know best what bills they need to pay. And if we do not do this cash payment immediately, before the big industry and corporate bailouts start, then families will pile on credit card and predatory debt just to make ends meet. Speaker Nancy Pelosi is talkings about refundable tax credits; that is not nearly immediate enough. It misses the reality of the vast majority of American households, who are facing increased expenses and decreased wages this week. They cannot wait for long appropriations battles about social programs. The Treasury should cut these checks before April 1 when many bills will come due."

Andy Levin (D-MI) has the single best voting record of any member of the House. Yesterday he told us that "Trump made the conscious decision to tie his success to the economy, and more specifically, the stock market. When you own the rise, you own the fall. In more ways than one, the downturn we're faced with now is because of this president's foolishness. While he couldn't prevent the initial outbreak of the coronavirus, President Trump could have done much more to prepare for it. For starters, he should not have fired the White House's pandemic response team in 2018. He also should have taken the threat of the disease seriously instead of misleading the public about its disastrous potential.

But before there was coronavirus, we were still facing a manufacturing recession. Workers' wages weren't going up and wealth inequality continued to balloon out of control. All the while, the president touted a stock market while half of Americans don't even own stock.

Thanks to hardworking medical professionals, the sacrifices made by working people and sincere efforts to practice good public health, I believe we will overcome this pandemic having learned some valuable lessons.  But never forget that many of the billions of dollars lost during the outbreak stem from a president who is able to manage neither a public health crisis nor a just economy."

Tom Winter is a progressive state legislator from western Montana running for the state's at-large congressional seat. "It's clear," he told us, "that the U.S. preparedness and response to this global pandemic has been bumbled from the get-go. Now, due to a complete lack of leadership from the top of our government we are on the verge of at the very least an economic recession, and at the very worst a financial collapse. While the federal government and politicians focus on saving Wall St. and the Big Banks, there's still a vast majority of working families in this country that were already struggling through this great stock-market run. So, my concern in the midst of this pandemic and national emergency lockdown is with the workers that aren't in line for bail outs or massive infusions of capital from the federal government. Yet, they're the ones that are getting laid off from work and still having to pay the bills. That's why, as a state legislator and U.S. Congressional candidate, I will be pushing for proactive protections for working families. Such as suspension of disconnections for non-payment from all utilities, paid sick leave extended to all workers, extension of unemployment benefits to workers laid off, pausing all evictions, making sure insurers follow through with the President's promise to make all COVID-19 testing and treatments free of any out-of-pocket expenses, and anything else that will dampen the effects felt by workers. We can not let the response and recovery of this crisis be like every other in recent memory, with all the focus, attention, and resources going to those with wealth and power."

UPDATE: From Goldman Sachs

Some of this is interesting and some of it is wishful thinking, but it's worth knowing what these big firms are thinking-- even if they're mostly off base. This is from their big investee call yesterday (with 1,500 firms dialing in):

50% of Americans will contract the virus (150 million people, give or take) as it's very communicable. This is on a par with the common cold (Rhinovirus) of which there are about 200 strains and which the majority of Americans will get 2-4 per year.

70% of Germany will contract it (58 million people). This is the next most relevant industrial economy to be effected.

Peak-virus is expected over the next eight weeks, declining thereafter.

The virus appears to be concentrated in a band between 30-50 degrees north latitude, meaning that like the common cold and flu, it prefers cold weather. The coming summer in the northern hemisphere should help. This is to say that the virus is likely seasonal.

Of those impacted 80% will be early-stage, 15% mid-stage and 5% critical-stage. Early-stage symptoms are like the common cold and mid-stage symptoms are like the flu; these are stay at home for two weeks and rest. 5% will be critical and highly weighted towards the elderly. [ASIDE: my doctor-- who has extremely important medical connections in China-- told me yesterday that 61.5% of those in critical care in the best hospitals have died.]

Mortality rate on average of up to 2%, heavily weight towards the elderly and immunocompromised; meaning up to 3 million people. In the US about 3 million/yr die mostly due to old age and disease, those two being highly correlated (as a percent very few from accidents). There will be significant overlap, so this does not mean 3 million new deaths from the virus, it means elderly people dying sooner due to respiratory issues. This may however stress the healthcare system.

There is a debate as to how to address the virus pre-vaccine. The US is tending towards quarantine. The UK is tending towards allowing it to spread so that the population can develop a natural immunity. Quarantine is likely to be ineffective and result in significant economic damage but will slow the rate of transmission giving the healthcare system more time to deal with the case load.

China’s economy has been largely impacted which has affected raw materials and the global supply chain. It may take up to six months for it to recover.

Global GDP growth rate will be the lowest in 30 years at around 2%.

S&P 500 will see a negative growth rate of -15% to -20% for 2020 overall.

There will be economic damage from the virus itself, but the real damage is driven mostly by market psychology. Viruses have been with us forever. Stock markets should fully recover in the 2nd half of the year.

In the past week there has been a conflating of the impact of the virus with the developing oil price war between Saudi Arabia and Russia. While reduced energy prices are generally good for industrial economies, the US is now a large energy exporter, so there has been a negative impact on the valuation of the domestic energy sector. This will continue for some time as the Russians are attempting to economically squeeze the American shale producers and the Saudi’s are caught in the middle and do not want to further cede market share to Russia or the US.

Technically the market generally has been looking for a reason to reset after the longest bull market in history.

There is NO systemic risk. No one is even talking about that. Governments are intervening in the markets to stabilize them, and the private banking sector is very well capitalized. It feels more like 9/11 than it does like 2008.