Covid-19 Has Exposed Our Financial Fragility
The comments below are an edited and abridged synopsis of an article by Jonathan Tepper
In less than a month, we have seen major indices fall almost 30%, and stocks in sectors such as oil and travel fall by 80%. We are experiencing declines not seen since the 1929 stock market crash that preceded the Great Depression.
Covid-19 is a catalyst bringing many long-simmering problems to the boil. It is exposing the creaking financial systems around us, and it will change the way economies function. Economic and financial pundits have been focusing on the short-term effects of coronavirus, and are missing the much bigger themes at play.
This is an epochal turning point, a great reset. The coronavirus is the grain of sand that will cause the avalanche. Governments will spend money with few constraints, aided by central banks. It’s a strategy that has not worked well in emerging markets, and it did not work well in the 1970s.
The government must compensate citizens for mandatory curfews and quarantines. The short-term effects of the lockdowns must be mitigated, but temporary policies must not become permanent political expedients.
That’s why the danger is not imminent; it’s five to ten years away, when the crisis has passed, along with the reason for UBI and monetary easing. What politician will be disciplined enough to stop spending? What central bank will raise rates when it is unpopular to do so?
Today we are reaping the whirlwind of the last financial crisis. Rather than pursue lower leverage, less debt, more robust institutions and more responsible corporate behaviour, investors and companies instead learned that they would be bailed out in a crisis.
Central banks became enamored of their own success as fire fighters, and they have been encouraging reckless behaviour, prizing low volatility over a robust financial system, viewing ‘risk management’ as preferring no financial corrections.
They should accept that sometimes putting out every single fire creates greater conflagrations. They should be humbler about the extent and limits of their power. It looks like they’re about to learn the hard way.