Op-ed: Moral
Hazard During a Pandemic: The Case for U.S. Leadership
By Puru Trivedi /May 2020
The term “moral hazard” is used
often in economics, resurfacing every time America faces a calamity.
During each of these “once in a lifetime” moments, which seem to happen
once a decade, the private sector craves that which makes all enterprise
tick. In these crises, business yearns for predictability, certainty and
transparency.
It also yearns for protection — and the coronavirus crisis is no
different, with the private sector looking to the U.S. government to
provide it with a safety net during these uncertain times.
Yet it is apparent that no part of life in these times is certain, and
government support can be a double-edged sword, offering an immediate
salve to stabilize the economy but at the potential cost of handicapping
it in the future if it buckles under the weight of excess debt.
This financial risk, however, is the price we must pay to prevent a total
collapse of the economy right now. Likewise, we face the moral dilemma of
rescuing the economy at the risk of human lives if coronavirus cases surge
and spread. But this is a false dichotomy because with the right
long-term strategy and strong global cooperation, the United States is
capable of tackling this twofold challenge.
The Federal Reserve, whose headquarters is seen above, has made the
cost of borrowing cheaper than ever before in an effort to combat the
steep downturn caused by the coronavirus pandemic. Photo:
AgnosticPreachersKid - Own work, CC BY-SA 3.0
That’s why what we do in the coming weeks is so important, because it
will affect the following months, and those months will inform the
medium- to long-term trajectory of the U.S. economy for years to come.
In economics and finance, moral hazard exists when a protected business
will engage in riskier-than-average behavior by virtue of the fact that
it is protected (such as when it is covered by insurance). Thus, an
entity increases its exposure to risk because it does not have to bear
the full costs of that risk.
In line with our current reality, the Federal Reserve has done its duty
by making the cost of borrowing cheaper than ever before. This move, in
theory, encourages businesses and individuals to borrow, which in turn
should encourage spending and investment. Warren Buffett, in his latest
Berkshire Hathaway shareholders meeting in May 2020, said that the recent
actions of the Fed should be lauded, but not without recognizing the
potentially extreme consequences for the U.S. economy down the road.
Buffett, along with another legendary investor, Jim Rogers, have sounded
the alarm on rising debt levels for years, emphasizing corporate debt. As
of April 2020, U.S. consumer debt was at a historic eye-popping figure of
$14.3 trillion (yes, with a “t”) — a number roughly $1.6 trillion more
than the worst levels during the 2008 financial crisis. The corporate
debt bubble should raise even more concern than the consumer bubble, and
the Fed’s announcement that it will begin to purchase corporate
high-yield — referred to as “junk” — bonds has emboldened many
participants of capital markets to take on more risk.
The Fed has signaled it will buy the corporate debt/bonds of “fallen
angel” companies that have been downgraded due to Covid-19 concerns; that
includes household-name companies such as Heinz and General Motors, and
companies with specific strategic national importance such as Boeing and
Delta.
Does the Fed backstop make our private sector grow back faster, or
encourage risk-taking with the knowledge that the government will be
there to prop them up if they fail? These notions give rise to moral
hazard in the traditional economic sense, but in the context of a
pandemic, the necessity for action trumps the debate over long-term
consequences.
Businesses have been looking to the U.S. government for help during
the coronavirus pandemic. So far, Congress has passed over $3 trillion in
stimulus spending to help companies and workers, but there is growing
apprehension, especially among Republican lawmakers, about the ballooning
levels of debt. Photo: Pexels from Pixabay
It is critical for all governments to step in and perform the difficult,
yet critical, measures needed for the economy during its darkest hours,
even if they might have long-term consequences. The U.S. is also not
alone in these measures; the actions of the Federal Reserve are being
mirrored by the European Central Bank, the Bank of Japan and other
leading financial regulators — and rightfully so in a crisis of such
global nature.
At the same time, it is important to highlight the emergent moral hazard
in our country — the false choice between saving life and saving the
economy. As many other developed countries will attest, this situation
should not be an either-or choice. With the right strategy, the U.S. can
both save lives and its economy. The key is a strategy that is
well-defined, has buy-in and is broad in scope.
Nobody professes to have all the solutions to this crisis, yet it is
important to ask questions, seek answers and accept the realities of what
we as a country, and as a human race, will be forced to endure. In doing
so, it is also important to consider what will define the overarching
strategy in the months ahead, and how that strategy varies from tactics.
Tactics refer to the skill of handling difficult situations to achieve a
specific goal. Strategy is defined as a comprehensive, high-level,
long-term plan.
The question, then, is what is the U.S. overall strategy for the coming
months? Testing and tracing are tactics, but not strategy. By all
accounts, the U.S. has done more testing than many other developed
nations, and knowing the prevalence of the virus in the population can
offer precious data to feed into broader strategy. But if that data does
not inform a strategy, what good is it?
Moreover, testing is not the cure-all that many tout it to be, according
to Laurie Garrett, a Pulitzer Prize-winning author and one of the first
to sound the alarm on Covid-19.
Garrett spoke to Frank Bruni of The New York Times for a recent article
in which she said that what America needs right now “isn’t this drumbeat
of testing, testing, testing, because there will never be enough
superfast, super-reliable tests to determine on the spot who can safely
enter a crowded workplace or venue, which is the scenario that some
people seem to have in mind,” Bruni wrote.
“America needs good information, from many rigorously designed studies,
about the prevalence and deadliness of coronavirus infections in given
subsets of people, so that governors and mayors can develop rules for
social distancing and reopening that are sensible, sustainable and
tailored to the situation at hand.”
It is a false assumption that people who want to save lives want to ruin
the economy, and it’s unfair to label those who want to see their
businesses reopen as callous toward the sad, but inevitable death that
will occur as a result. While the goals of Wall Street, the U.S.
government and the public may seem vast and contradicting, we must
realize that there is only one goal: controlling and eliminating the
virus.
Our strategy needs to be grand and bold, in the spirit of the virtues
that made our country great to begin with. It must be global in scope
while local in practice, and we must realize that tackling this crisis
needs to be done together, even while staying apart.
An all-out political, social, economic and trade policy response is
needed, and this will require international buy-in and support. Our
international institutions will be tested in a way like never before, and
this will inform the future of the post-World War II era that America
helped shape and define. We must come together to collectively envision a
future in which the virus is gone because of the actions we took now.
America needs to lead this effort globally, but this path cannot be taken
alone and will require joint commitment by the entire world. American
leadership is needed now more than ever, and while leadership is hard to
define, it is easy to identify.
The moral hazard we face today is not whether companies will misuse their
stimulus relief or start buying back their stock to deliver greater
shareholder returns. America’s private sector contains some of the finest
corporate citizens in the world, and nearly all companies want to do right
by all their stakeholders — and not direct shareholders exclusively.
The real moral hazard we face is the false choice between saving lives
and saving our economy. America, along with its allies and other major
nations, must face this challenge head on, and truth-telling, coupled
with an overarching strategy, intense knowledge sharing and other major
nations, must face this challenge head on, and international cooperation,
coupled with an overarching strategy, intense knowledge sharing and truth
telling, will be the key to our recovery and eventual return to normal.
Puru Trivedi is the vice president
of corporate affairs for the Meridian International Center, with direct
responsibility for the Meridian Corporate Council and commercial
diplomacy initiatives across the organization. The views expressed here
are his own.
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