Markets Get Nasty TARP Flashback With Deeper Rout on Virus Delay
A Political Fight Over Virus Alarms Anyone Who Remembers TARP
(Bloomberg) --
The coronavirus panic deepened across financial markets Thursday as politicians in charge of the U.S. budget -- under a harsh spotlight from the world’s investors -- struggled to respond with the speed and unity that investors are clamoring for.
From Nobel prize-winning economists to the biggest money managers, everyone is demanding fiscal stimulus, and fast, to fill what may soon be a gaping hole in the economy. But President Donald Trump’s initial response got a resounding thumbs-down from markets, and any bigger-scale moves are likely to come with a lag, and maybe some political horse-trading.
The Federal Reserve -- the chief firefighter in past crises -- can take action with just a handful of people making the call, and it already delivered an emergency cut in interest rates. But for the government to deploy the power of the purse requires bargaining among hundreds of lawmakers, from parties deeply hostile to each other.
Both Trump’s Republicans and Democrats who control the House of Representatives say an infusion of cash is needed. They don’t agree on what it should look like, though efforts continued Thursday -- in a phone call between Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi -- to bridge the gaps.
One ominous precedent for investors, which highlights the pitfalls of trying to do fiscal policy on the fly, dates back to the 2008 crisis.
TARP Trauma
In September that year, with markets in turmoil weeks after the collapse of Lehman Brothers, Congress voted down a $700 billion stimulus program submitted by the George W. Bush administration. That triggered one of the most spectacular market routs, even in that disastrous year.
The bailout known as TARP got passed in the end in a second attempt, but plenty of financial damage was done in the meantime.
There are similarities in what’s playing out now, though a key difference is that in 2008 the economy had been shrinking for almost a year when lawmakers turned to TARP, said Neil Dutta, head of economics at Renaissance Macro Research in New York.
Right now, there’s still time to avoid a recession, Dutta said. But, “given the political animus in Washington, our fear is that whatever stimulus does come, comes too late.”
‘Up Big, Down Big’
For several days, dramatic moves in equity and bond markets have been driven by the hope of government action on that front and the fear of its absence. Early this week, Treasury bond yields hit all-time lows. By the end of Wednesday, U.S. stocks had fallen into a bear market.
“Up big on the expectation that something is announced, down big when it’s made obvious the details are far from being worked out,” Dutta said. The swings deepened Thursday morning when U.S. stocks once again plunged and hit circuit-breakers, then continued to drop after trading resumed.
Trump said he would suspend travel from Europe to the U.S. for 30 days and deliver paid sick leave to hourly workers. He’ll also defer tax payments for people and businesses affected by the virus, which he said will inject “$200 billion of liquidity,” and push Congress to cut payroll taxes.
“It could be the first swing at this,” said Ryan Sweet, head of monetary policy research at Moody’s Analytics. “It’s so far a swing and a miss.” He added: “It could be a TARP moment again.”
‘Carry the Football’
Pelosi has been pressing ahead with plans for a Thursday vote on her party’s virus plan. Late Wednesday, House Democrats unveiled emergency legislation including expanding paid sick leave and unemployment benefits as well as free coronavirus testing. Lawmakers in both parties have been cool to Trump’s payroll-tax cuts.
The White House doesn’t back much of that plan as currently drafted, though it supports many of the overall policies, an aide said Thursday.
Timing for any of these proposals, or a combination of them, is an issue. Congress moves on a schedule that’s completely different from fast-paced markets. It’s about to go into a week-long recess, and Senator John Cornyn of Texas, a leading Republican, said larger measures would likely have to wait until after that.
To be sure, there may be more consensus on the need for budget action now than there was when TARP first flopped. The idea of helping out struggling households and businesses in a health crisis -– unlike the support for Wall Street banks that was part of the Bush bailout – commands broad support.
Trump is also trying to browbeat the Fed into cutting rates more. And there may be other steps, like the tax-deadline move, that the administration can take on its own. But the most powerful tools will require a congressional vote.
“It’s obvious the Fed’s ammunition is low-powered,” Dutta said. “Fiscal policy needs to carry the football.”
--With assistance from Matthew Boesler, Katia Dmitrieva, Justin Sink and Kathleen Miller.
To contact the reporter on this story: Ben Holland in Washington at bholland1@bloomberg.net
To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Malcolm Scott
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