Policy Makers Start to Find Their Footing in Virus Response

(Bloomberg Opinion) -- U.S. financial markets, roiled on Thursday by the second-largest daily stock drop in history in percentage terms, opened higher on Friday after policy makers finally reacted more forcefully to the unprecedented dangers that the coronavirus poses to economic prosperity and financial stability. To sustain that rebound in the immediate term, deep-pocketed buyers must commit in a big way and overwhelm trapped longs and forced sellers. More important for the longer-term, they need to believe that this response is part of comprehensive plans that form a critical mass to overcome not just what is likely to be a global recession but also an inherent contradiction between the current phase of the health response and the wiring of a modern market-based economy.

Policy makers, who underestimated the cascading economic sudden stops and then responded and communicated ineffectively at first, are finally establishing the foundation for a comprehensive and effective monetary and fiscal response.

The European Central Bank and the Federal Reserve took more targeted steps on Thursday to relieve market malfunction that, if persistent, would cause financial dislocations that would damage an already fragile global economy. This followed Wednesday’s example-setting actions by the Bank of England and the Treasury in the United Kingdom. 

In a rare sign of bipartisanship, the U.S. Congress is on the verge of approving a package that would enhance safety nets, strengthen unemployment and sick benefits and provide free virus testing. Germany signaled what seems like an unprecedented willingness for seemingly major fiscal stimulus and open-ended credit programs. The European Union is ready to relax budgetary constraints on many of its member countries. Italy and Spain banned short selling, though unlike the other measures, the effectiveness of such a circuit breaker tends to erode.

If targeted well, most of these steps should be thought of as encouraging first steps that can also be the base for a multiphase approach that first plays effective defensive and then switches to offense to spur a genuine economic recovery that is inclusive and sustainable. 

The most recent health news has also included more encouraging elements. The U.S. is increasing the deployment of crucial coronavirus testing kits while also accelerating efforts to develop a vaccine.

To go beyond a short-term bounce in markets, the policy response needs to form a critical mass on two fronts:

• Countering what are still-deteriorating economic and corporate fundamentals that are likely to include a global recession.
• Reconciling the health policy approach — which is emphasizing social distancing, separation and isolation — and the reality of a modern market-based economies — which include high interconnectivity, globalized companies and the cross-border effects of policy decisions.

Everyone should be encouraged by the policy pivot this week from inadequately targeted and poorly communicated measures to what can be the foundation of a potent, comprehensive and lasting approach that minimizes the damage to society and sets a framework for longer-term inclusive and sustainable growth. This needs to continue if the global economy and markets are to avoid a further huge hit from this unprecedented health shock.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge, senior adviser at Gramercy and professor of practice at Wharton. His books include "The Only Game in Town" and "When Markets Collide."

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