Article written by Bridgette McCooey
Barely over a decade since the last economic recession, the United States financial system faced an unexpected downturn of events that left the country on edge. As the first confirmed U.S. case of the coronavirus surfaced in late January, citizens became concerned, but were reassured by their leaders that everything was under control. Roughly two months later, the United States erupted—securing the number one spot for active COVID-19 cases. Now, another five months later, the U.S. has lost approximately 225,000 of its citizens, accounting for almost a fourth of the total worldwide deaths.
Not only did the statistics express a clear danger for the health of millions, but for the stability of the financial system. In February, the pandemic brought an end to the U.S. bull market and skyrocketed the unemployment rate to 14.7% this past April: an all-time high since the Great Depression [WSJ/6.26.20]. However, it was not at the fault of lenders and banks similar to that of the 2008 Recession, but an invisible enemy terrorizing unexpecting “non-essential” businesses and workers, who now had to think of a plan quickly, or their fate would be sealed. Yet, the coronavirus is just a relative of the common flu, so could its impact really be that detrimental? This thinking is what sabotaged business owners across the nation. Initially, these businesses underrated the severity of the virus and its potential influence on markets; now, thousands of small businesses have been forced to shut down due to the lack of alternatives.
Although neither these small businesses nor the banks are to blame for the cause of the downturn, the intense drop in interest rates prove that a repeat of the 2008 Recession is not impossible. Additionally, the new revisions of the 2010 Dodd-Frank Act effectively weaken oversight regulations on the companies that had committed such hazardous behavior only fifteen years ago. As a result, transparency will again fade, leading oblivious consumers victim to an opaque market. How can we trust that the banks and government sponsored enterprises like Fannie and Freddie will not take advantage of unfit individuals who are willing to borrow once again?
The Federal Reserve’s role in preserving the U.S. economy is vital, especially in high-risk times. This past March and the 2008 housing bubble are two prime examples where immediate government response was required to single-handedly make-or-break the economy. In contrast to their quick and influential response to the adverse effects of the coronavirus, the Fed’s hand in the origination of the 2008 Recession further contributed to and kickstarted the downfall. After the tragic events of 09/11/01, America’s central bank kept rates extremely low for a period spanning three years. Despite their good intentions, these prolonged near-zero rates only encouraged excessive lending to unfit individuals, resulting in the collapse of the housing market. The banks took advantage of said individuals, leading them to believe that the incredibly low rates would prevent them from completely defaulting on their loans in the future. Unfortunately, exactly that transpired. With the rapid increase of the effective federal funds rate after 2004 to a peak of just over 5% in 2007, thousands of citizens defaulted on their housing loans and home prices plummeted.
In March, it was the pandemic that brought turmoil within financial markets. The Fed responded accordingly, shooting rates down to just above 0% in hopes of seeking periods of higher inflation [WEF/8.28.20]. By lowering interest rates, the Fed also acted to prevent the pullback of credit availability to combat the increasing unemployment [WSJ/3.3.20]. Although the central bank’s response by Chairman Jerome Powell appears appropriate and has yielded an increase of employment since the severe drop in March, it is difficult to predict what the future holds. If the rates are kept near-zero for years to come— equivalent to the actions following 9/11— could we be heading toward another period of risky lending? Moreover, are we heading toward another economic collapse?
The course of action to combat these fears proposed by Jerome Powell is increased fiscal policy by Congress. However, in true American fashion, a stalemate between Republican and Democratic members of Congress has made passing any legislation difficult [WSJ/09.21.20]. The continuing partisanship along with the heat of the upcoming election has lured priorities away from the virus, leaving many crucial parts of our economy in despair. The Fed’s tools are dwindling, and Jerome Powell has sent a cry for help that has yet to be fulfilled. With unemployment rates still high, steps must be taken to help the jobless and their families.
In 2009, Congress passed the American Recovery and Reinvestment Act following the intense decline of employment due to the recession [FCC]. The act greatly assisted the end of the economic downturn by creating copious construction products, immediately putting the unemployed to work. Infrastructure projects can substantially decrease unemployment and, once funded, have quick effects. Therefore, Congress could do the same now and pass legislation to implement said projects without nearly as much discourse. The main disagreement between the Republicans and Democrats in office is not whether they should increase fiscal policy, but by how much. Thus, introducing an infrastructure bill could reduce their discord, as they will not only expand fiscal policy, but create jobs as well. As employment eventually steadies along with the economy, interest rates can slowly rise to prevent dangerous behavior by banks and lenders. However, steps still need to be taken before this can become a reality. The U.S., as of October 2020, is still climbing in number of confirmed coronavirus cases. With the health and welfare of citizens being the priority, small and suffering business are still struggling to stay afloat as they are barred from entry into the once-booming markets. Once there is an efficient and safe way for Americans to leave their homes without fear of contracting or spreading the virus, the U.S. can find its way back to stability. Furthermore, our economy can avoid another recession and keep our citizens safe from potential disaster.