First, I think that this article from MIT Technology Review is essential reading, if you have not already seen it.
According to Duane Newton, the director of clinical microbiology at the University of Michigan, the biggest limitation in diagnostics is not the technology, but rather the regulatory approval process for new tests and platforms. While this process is critical for ensuring safety and efficacy, the necessary delays often “hamper the willingness and ability of manufacturers and laboratories to invest resources into developing and implementing new tests,” he says.
Case in point: FDA rules initially prevented state and commercial labs from developing their own coronavirus diagnostic tests, even if they could develop coronavirus PCR primers on their own. So when the only available test suddenly turned out to be bunk, no one could actually say what primer sets worked.
Read the whole article.
Next, today’s WSJ has many editorials and op-eds that discuss measures to help households get through the crisis. But the most interesting piece is by Hal Scott on the financial sector. He says that after the 2008 financial crisis abated
there was growing public concern about “moral hazard”—that government backstops and guarantees created incentives for risky behavior. In response, the Dodd-Frank Act of 2010 limited the Fed’s lender-of-last-resort powers for nonbanks, an increasingly important part of the financial system. Fed loans to nonbanks can now be made only with the approval of the Treasury secretary. They must be done through a broad program, unlike the one-off rescue of AIG, and must meet heightened collateral requirements. Loans to nonbanks must be disclosed to congressional leaders within seven days and to the public within one year.
I agree that we should be concerned about the financial sector, because of the way that it can magnify an economic crisis. But just as in 2008, I would try to avoid loans to financial institutions and other forms of bailouts. Back, then, I proposed “forbearance,” meaning allowing banks to fall below regulatory capital standards for a while. I still prefer this approach. It might reduce the contraction of the financial sector without providing a direct transfer of resources from taxpayers to banks.
Commenter Jeff thought along similar lines.
I wonder if you couldn’t mitigate some of the worst effects of defaults with some kind of mass forbearance policy. After all, if Southwest no longer has the cash flow to cover the financing costs of it’s fleet, what are its creditors going to do in the middle of a public health crisis? Come and repo the jets? In order to do what with them?
Finally, the headline yesterday that stock had fallen 20 percent from their peak caused me to wonder whether that is too much. Here are the arguments for and against a sizable stock market drop.
The case for a sizable drop:
–When we have a recession, not only does GDP drop but the ratio of corporate profits to GDP also drops. This “double whammy” on profits is a reason that stocks should fall farther than the economy. Another way to think of this is to treat an index fund as a levered position in GDP. If GDP falls by X percent, then the index fund should fall by a multiple of X percent.
–A significant share of corporate profits of U.S. firms now depends on overseas activity. Some important trading partners appear likely to be hit particularly badly by both the virus and by their financial fragility.
The case against a sizable drop:
–Although trade and tourism are big industries, they are a relatively small share of the U.S. economy overall.
–This, too, shall pass. At some point, even trade and tourism will recover.