Executive Vice President of Research and Policy, Clay Lowery, answers six big questions about the potential tools available to policymakers combating the economic and financial impact of the COVID-19 pandemic. 

 

Rough Transcript:

Dylan Riddle, Director, Corporate Communications, IIF

In this time of uncertainty. It's important to be digging at the real questions, big questions. That's what we hope to do with this podcast. We're going to go behind the data and bring you insights and analysis from the top experts in their fields. Some of them might be my colleagues at the Institute of International Finance and others might come from member institutions, you, policymakers or academics. Either way, our goal is to bring you the most important information in a timely manner. Welcome to the big questions. This is your host Dylan Riddle and today I'm joined by my colleague, Clay Lowery, who is the executive vice president of research and policy at the Institute of International Finance. He's going to be answering some of my big questions about the current financial situation during the coronavirus or COVID19 outbreak, but I want to go ahead and give you a little bit of play's background before we get started. Clay Lowry was previously managing director at Rock Creek Global Advisors and International Economic Policy Advisory firm where he focuses on international banking regulations, sovereign debt, macroeconomic policies, exchange rate, and investment public policy. Prior to that, he held multiple positions at the US treasury department, culminating in serving as the assistant secretary for international affairs and was a senior official in the treasury where he worked on several programs to combat the crisis in 2008 welcome to the show, Clay Lowery.

Clay Lowery, Executive Vice President, Research and Policy, IIF

Thank you very much. Thanks for having me. I look forward to today's discussion, but before I start talking about financial policy matters, let me just say that our first and foremost thoughts are with the people who are suffering from this Coronavirus, whether they are those that have caught this disease or their family members or the doctors and nurses who are working tirelessly to help alleviate these problems. But with that being said, I'm happy to just take your questions.

Dylan Riddle, Director, Corporate Communications, IIF

Our first question to start with is with the federal reserve, what bullets have they used so far and what do they have left?

Clay Lowery, Executive Vice President, Research and Policy, IIF

The federal reserve is actually taken many steps over the last, we can a two week and a half. It has taken steps that are more normal for the fed, such as is reduced its interest rates. It's done that by, I'm 150 basis points in two different sessions and essentially brought their interest rates down to close to zero. Um, it also provided guidance or forward guidance that said that they would be limp. They would keep interest rates very low for a long period of time. It also reinvigorated the quantitative easing program to the tune of $700 billion. They will be purchasing our treasuries, as well as mortgage, backed securities. The second part of their toolkit has been more on what I would think of as providing liquidity to markets. They've been doing that through the interbank lending market and that is done that the New York fed, this is something that they'd been doing actually since September of last year for a variety of reasons. They sped that program up and uh, increased it significantly on Sunday night. They said that they would open up their, what is called a dollar swap lines, uh, with some various central banks around the world because there are dollar liquidity shortages. And we've seen some banks already starting to tap those swap lines. We saw this in Japan, for instance, they initiated a program that it was actually, in my opinion, at least a fairly successful program during the 2008 and 2009 financial crisis, which was to provide liquidity to non-financial corporates that do that through by providing liquidity to commercial paper. They do this by getting backstop from the US treasury department. So there's been sort of those types of approaches. So, there's a kind of the more classical monetary policy, the quantitative easing, but then also a lot of liquidity lines.

What more could they do? It's hard. They've taken a number of steps. There are areas that the European sometimes do. They have a program called TLTRO. It's basically a support mechanism so that banks can provide longer-term lending and feel more secure about doing that. Well, they have not done anything like that. That's actually a program that the fed has not introduced in the past. And then there are some more radical proposals, that probably aren't really worth talking about right now, but I think that the fed has shot a fair amount of the bullets that it has and which is probably why we're going to be turning fairly soon to the fiscal measures. But this is kind of the Fed's playbook. Some of it has worked in the past, some of it has not worked as well. We saw the markets have been quite volatile since the major announcements by the fed on Sunday. They went way down on a Monday and they came back up a little bit. They've taken a number of steps, but there's probably more to do that is not necessarily in the Fed's wheelhouse.

Dylan Riddle, Director, Corporate Communications, IIF

We've just seen the fed expand swap lines to some emerging market central banks. Can you walk us through why this is an important move and more broadly, what swap lines do to support the system during this time?

Clay Lowery, Executive Vice President, Research and Policy, IIF

Yeah, so let me take your second question first. So swap lines essentially help provide dollar liquidity outside of the United States. So, the dollar is the reserve currency of the world and the fed I think recognizes that with the privilege of the dollar being the reserve currency also comes to the responsibility and difficult financial times, which obviously we are in. That type of liquidity dries up very quickly and it dries up around the world because of the role of the dollar plays. So, what the fed did on Sunday was expanded its swap lines to a number of developed market countries starting with the ECB and the Bank of England and the Bank of Japan as well as a few others. Today what it's done is it's expanded that beyond to a number of other countries including for emerging market countries, South Korea, Mexico, Brazil, and Singapore. The that this is important is because what you did start seeing after the announcement on Sunday was that some of the dollar liquidity problems that we were seeing globally got much better in the countries where the fed had actually introduced the swap lines.

But then it got much worse in some of the emerging market countries. I think the Fed's action this morning is to try to alleviate those issues. It does open up a different question, which is, okay, what about the emerging market countries that do have a lot of dollar assets and that do not have a swap line and I think that this is where the fed would argue and I and others that this is more of a role for the International Monetary Fund to play and so the IMF has actually talked about doing some liquidity lines themselves to try to actually alleviate some of the problems which the Fed has already started to do.

Dylan Riddle, Director, Corporate Communications, IIF

Swap lines take a lot of coordination. Is there enough coordination going on across the system? Obviously, you have at central bank level the swap lines, but are we seeing enough, you know at the broader government level, the G7 or the G20?

Clay Lowery, Executive Vice President, Research and Policy, IIF

I think we are starting to see better coordination. The central banks are almost always better coordinated than finance ministry and other officials just because of the nature of the type of work they do. And I think the swap lines you saw, it was a joint announcement on Sunday. We've seen a number of central banks through our taking their actions. So we have not seen what we saw in 2008, which is a coordinated interest rate cut. But we have seen different banks taking interest rate cuts themselves, plus providing different types of liquidity instruments to each other. Coordination in many respects could pick up and become better over time, but it has been harder if you think about it. We're in a situation where you're not allowed to travel to each other's countries, work, self-isolating at home. So I think that it is a, it's positive that we have seen finance officials coming together to coordinate during fairly difficult times. That doesn't mean that they can't improve upon that and hopefully will see that going forward.

Dylan Riddle, Director, Corporate Communications, IIF

Speaking of coordination, what role does the IMF, or the World Bank have to play in this going forward?

Clay Lowery, Executive Vice President, Research and Policy, IIF

So the IMF and the world bank are going to be important for different reasons. So, the IMF in many respects becomes a little bit closer to a lender of last resort for emerging markets and lower-income countries. So developed markets there. The central bank is the lender of last resort, as is the case in emerging markets and lower-income countries. But I think the IMF kind of plays up role to that. They have said over the last few days that they are willing to step up and provide support. One area that it could be interesting is they have said that they are willing to make $50 billion available for essentially something close to the Fed swap lines, which is liquidity support that would not have to take an IMF program. This is a new instrument and it'll be to see whether or not any, countries take this up.

There has been in the past what would be called almost a stigma fact, which is that countries don't want to go to the IMF because they're worried that this will signal to markets that they're in some sort of trouble. This is something you sometimes hear about it in the domestic context, which is whether or not, banks can go to the federal reserve for, to the discount window. And so is there a stigma of going to the discount window? Cause you don't want to show that you're in trouble. In this case, this is done at the sovereign level as opposed to the banking level. If this needs to happen, one would think, one would hope that some of the stigmas could go away. Maybe that is something that the IMF could be working on. The world bank has a different role because they work with long term development, particularly the poorest countries.

I think an area where, I have not seen this to date, but I could see the world bank trying to improve upon its trade finance facilities. So, the World Bank back in 2007, 2008 made a significant amount of room on their balance sheet available for trade finance because banking trade finance dried up. And so, the World Bank kind of stepped into that role. We may see something similar, we have not seen it today, but trade finance can become critical and it's a low margin business. And so, you could see the world bank needing to step in if they if private sector banks are worried about their own balance sheets are not able to provide as much trade finance. So I'm not sure that's going to happen. Otherwise I think the world bank will be there, especially for the poorest countries to help them on just regular programs to help with the social safety net.

Dylan Riddle, Director, Corporate Communications, IIF

Pivoting just a little bit, but kind of broad question, where do we go from here? Obviously, there's talk of fiscal in the United States, but what does it look like and what about Europe?

Clay Lowery, Executive Vice President, Research and Policy, IIF

In some respects? This is what makes a lot of 2008 different than today is the hit from Coronavirus is hitting the real economy first and foremost. And so it's how do you help the real economy? And so that usually suggests that there is a role for monetary policy and there's a role for liquidity. Of course, that helps keep markets cleared. But probably the bigger issue is fiscal is the fiscal side. Now, fiscal policy, everyone, not everyone, but lots of different actors, including the IMF recently call on the coordinated fiscal stimulus or coordinated fiscal policy. This is an easy thing to say. It's a very hard thing to do. It's not like monetary policy. There's a lot of different structures involved. I'm getting fiscal policy done, but I think what we are seeing, so the coordination aspect is that the different countries are realizing that they're going to have to take fiscal measures.

And you're starting to see that you're starting to see different plans come out from different countries around the world. In the United States. Just today, we started hearing from the Trump administration ideas about putting out somewhere between $8billion and $1.2 trillion, which is known four to 5% or 6% of us GDP, which is a very significant number. The way that they've tried to structure it is, uh, to provide how do we provide cash and get that into people's hands so that we can help with aggregate demand, but we can also help the needs that are going to be, prominent because people frankly being laid off during this very difficult time. There will also be calls upon Congress to look at specific types of industries that may need loan guarantees. Um, so the ones you think about are the airlines' industry or the hospitality industry, but there could be others as well.

The Europeans, of course, it's a little bit different because you have different fiscal authorities within Europe. So, you have the European wide type of issues, but then Germany and France and Spain and Italy, they all have different and the, and now the United Kingdom, which is outside of Europe, outside of central Europe, continental Europe they're all looking at the different fiscal measures that they could use to try to, in some respects, it's, I would say jumpstart the economy, but it's probably actually more to salvage the economy. You know, it's as likely that we are heading towards the global recession and these types of instruments are there to basically try to limit the damage. And hopefully at some point help establish our recovery. But you are seeing that different countries around the world are taking steps and frankly in some respects, this is probably the most important step that they're going to take. It will be on the fiscal side just because most of the other bullets, as we discussed earlier, I've been shot, uh, the fiscal side has not, and this is really going to be a problem for the real economy much more than for the financial markets.

Dylan Riddle, Director, Corporate Communications, IIF

So, you made it pretty clear that this is a real economic issue, so it's not like 2008, but does that change the outcome? Are we still looking at a massive recession that has the same kind of implications that 2008 had?

Clay Lowery, Executive Vice President, Research and Policy, IIF

Obviously, differences and similarities. In 2008, it was the financial system that was primarily got clogged up and they name a bigger and bigger problem over time and then eventually essentially froze. And as it froze, this affected the real economy. And so it took a while from the time we first finally started seeing that there were problems in the markets until it actually started having a major impact on the overall economy. Here we're in a situation in which from the time we started really paying attention to the Coronavirus in a major way until it's going to have an effect on the real economy is going to be a very short period of time and very sudden. So it's basically a cliff that's happening. So, because of that, it means that the tools that you use, I think need to be somewhat different and somewhat adjusted.

And I, you know, and you're starting to see that, but I think it's a hard one to understand because we're not, we're also at a point where, okay, in 2008 we kind of understand where it was happening. There were, there were mysteries that would pop up every now and then. But here we're talking about a virus that we don't have a very good handle on, despite lots of effort by very, very amazing scientists and doctors who are doing incredible work, but we don't have a great handle on it. And because of that, that uncertainty is a hard thing to adjust to. So it's a hard thing to adjust to in the markets I'm sure. But it's also a much, maybe just a very hard thing to adjust to from a real economy perspective. So, we're looking at something that is quite different than 2008 but could have a very substantial impact on the overall economy in a way that 2008 may not have had. So, this is something, I mean, we're hopeful that obviously, we can STEM the tide and obviously we're trying to all take a lot of steps to do that, but it's, uh, a very difficult situation. Things are going to change on a day to day basis. So we will continue to update these things.

Dylan Riddle, Director, Corporate Communications, IIF

Thanks to Clay for joining us today. Be on the lookout for further updates from the Institute of International Finance, and we'll be back with a new episode really soon. In the meantime, subscribe to Spotify, Google Play, iTunes, or wherever it is that you listen to podcasts. Thanks again.