This week, Federal Reserve Governor Lael Brainard gave a speech via webcast to the National Association for Business Economics. She warned, effectively, that the rosy spin coming out of the Trump administration needed to be weighed against the reality on the ground. Brainard raised the caution that credit downgrades on bonds and corporate defaults are occurring at “a faster pace than in the initial months of the Global Financial Crisis.” Brainard explained as follows:
“In downside scenarios, there could be some persistent damage to the productive capacity of the economy from the loss of valuable employment relationships, depressed investment, and the destruction of intangible business capital. A wave of insolvencies is possible. As the Federal Reserve Board’s May Financial Stability Report highlighted, the nonfinancial business sector started the year with historically elevated levels of debt. Already this year, we have seen about $800 billion in downgrades of investment-grade debt and $55 billion in corporate defaults—a faster pace than in the initial months of the Global Financial Crisis. Several measures of default probabilities are somewhat elevated. It remains vitally important to make our emergency credit facilities as broadly accessible as we can in order to avoid the costly insolvencies of otherwise viable employers and the associated hardship from permanent layoffs.”
The warnings coming out of this week’s House hearing on “Promoting Economic Recovery: Examining Capital Markets and Worker Protections in the COVID-19 Era,” raised similar concerns.
Congressman Sean Casten of Illinois warned that “we are in a massive economic downturn,” adding this:
“Every single entity in our society is getting their cash constrained. Individuals who are losing their jobs are having to dip into savings or their retirement account; small businesses are having to chew through all their working capital; states and municipalities are having to spend through all their rainy-day funds. And those of us who have the ability to deficit spend are doing so on a fairly significant basis right now. To put it mildly.
“I mention that, because when this is all done, there’s gonna be a reckoning. Folks are gonna look out and say, in this moment, who stepped up and acted with ethics, to act with charity, and look out for those who were needy, and who decided to hoard their reserves. That is an ethical problem, it’s not a political problem. But as we saw after 2008, as we saw after the Great Depression, those ethical problems quickly become political problems. And we have to all think about that. We all have to be thinking about what we are doing in this moment to help those in need.”
Casten might well have been thinking about the Occupy Wall Street protests and encampments that took root all over the United States and in major cities around the world following the 2008 crash. Those Occupy protests galvanized public attention to the trillions of dollars in Wall Street bank bailouts while 10 million Americans lost their homes to foreclosure.
Casten might also have been thinking about the recent Black Lives Matter protests that have, in some cases, ended up with bank branches being burned and major retail chain stores looted. Or he might have been contemplating the words of the 19th century abolitionist, Frederick Douglass, who said: “Where justice is denied, where poverty is enforced, where ignorance prevails, and where any one class is made to feel that society is an organized conspiracy to oppress, rob and degrade them, neither persons nor property will be safe.”
One of the witnesses at the House hearing was Dr. William E. Spriggs, Chief Economist of the AFL-CIO and Professor of Economics at Howard University. Spriggs said this:
“Despite slight improvements in May and June from the records reported in April, we remain in the worst crisis the American labor market has faced on record. We face this dilemma, because the United States chose as its labor policy in response to the need to reduce human contact in fighting the Coronavirus to lay-off workers and use the unemployment system, rather than the policy most other industrialized nations pursued, which was to retain workers in place and subsidize employers’ that needed to shut down or reduce hours to be in compliance with social distancing…
“Rather than push workers into unemployment, other industrialized nations chose to subsidize the wages of workers and keep them connected to their employers…in most other countries, worker dismissals carry costs, and so unlike in the United States, policies to help with retention are received as very cost effective. New Zealand made greatest use of this type of program, covering about two-thirds of their workers, France over half their workforce were eligible, though only about a third actually were paid and Germany and Great Britain both covered about thirty percent of their workers. Through May, France, Italy and Germany remained with their unemployment rates in single digit levels….”
Unemployment in the United States currently stands at 11.1 percent. But Spriggs notes that “the unemployment rate in April for the workers in the most affected industries was a towering 34.1 percent, which is above the levels we believe were seen during the Great Depression. For Black, Hispanic and for women workers in these industries, their unemployment rates in April were roughly 38 percent.”
The most heavily affected industries according to Spriggs’ research are food and drinking establishments, hotels and amusement parks.
Spriggs added another caution about how the pattern of unemployment is changing:
“We do not have projections for unemployment levels through the end of the year from the Office of Management and Budget. But we do have estimates from the Congressional Budget Office that the average unemployment rate in the fourth quarter will be 10.5 percent. The pattern of layoffs is changing. In March, many workers reported their job loss as temporary. But this has now shifted toward larger shares of workers reporting their job loss as permanent separations from their employers…The number of those on permanent layoff has now climbed to over 2.8 million. That shift reflects weakness in the labor market beyond the sectors directly affected by social distancing, like the jobs lost in mining and oil, and the downturn in durable goods manufacturing, like in motor vehicles and parts. Further, it is showing in the change in unemployment duration, doubling the share of unemployed workers unemployed 5 to 14 weeks from 31.5 percent in February to 65.2 percent in June.”
The consumer represents two-thirds of spending in the United States, meaning that GDP growth is going to be dramatically impacted by the fiscal policies of Congress. Spriggs said that “Consumption in many products has fallen below 50 percent of normal 2019 consumption. Consumption of new light trucks and domestic new automobiles are off more than 30 percent. Only food bought for home consumption has kept up with 2019 levels.”
While the Federal Reserve has been showering Wall Street with trillions of dollars in below-market rate loans since September 17 of last year, the American worker and struggling American homeowner have once again been kicked to the curb, just as in the financial crisis of 2008. We have to wonder if the CARES Act fiscal stimulus was simply just another way to “foam the runways” for the banks so they don’t have to deal with too many foreclosures hitting them at one time. That was the plan in the last financial crisis. (See How Treasury Secretary Geithner Foamed the Runways With Children’s Shattered Lives.)
This article first appeared on Wall Street on Parade.