Coronavirus pandemic: Let’s remember what we learned in WWII, as well as in 2008
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There’s been a lot said in recent days comparing the COVID-19 pandemic to the 2008 financial crisis, including whether lessons learned then are applicable now. Granted, the situations are very different: that was a financial crisis that caused a recession, this is a public health crisis which is causing a recession that could become a financial crisis. But the main lesson from 2008 applies—act fast and with overwhelming force. The U.S. government has not yet done that.
Having been on the frontlines of the response to the 2008 crisis, I believe there’s a lot to be learned from 2008 regarding what it takes to act fast, such as what it takes to implement assistance programs quickly. But it’s equally important to remember some lessons from World War II about what a government can do in a crisis.
In the early 1940s, the government took aggressive action to mobilize private industry to produce aircraft, armaments, rubber, and all sorts of other supplies needed to fight the war. The administrative machinery for doing so involved the Reconstruction Finance Corporation, an agency created in the Great Depression to help stabilize the financial sector, whose existence was extended for the war effort. We would not have won the war without this massive effort.
Today, the federal government needs to mobilize—and finance if necessary—the production of whatever is needed to eliminate bottlenecks and limitations on the ability to contain the virus and treat the sick. More testing is an obvious need, as Dr. Anthony Fauci stated earlier this week. Public health experts can say what else is a priority, whether it is more hospital beds, more respirators, or other supplies. Taking such credible steps to contain the pandemic and treat the sick is necessary—though not sufficient—to calm the financial anxiety.
As is being debated in Congress, priorities should also include aggressive fiscal policies that help cushion the impact of contracting COVID-19 and the related social and economic disruptions, especially for lower- and average-income people. This includes subsidizing the cost of testing and treatment, sick leave or family leave pay, extended unemployment pay, and nutrition assistance for kids not at school. Putting more money in everyone’s pocket obviously helps too.
Acting fast doesn’t simply mean Congress passing legislation quickly, it requires adopting policies that can be implemented quickly. That’s one of the main lessons we learned in implementing the Troubled Asset Relief Program, the centerpiece of the response to the 2008 financial crisis. It was much easier and faster to provide capital injections to banks based on broad programmatic criteria available to most institutions, than the original idea to buy mortgage-related assets from banks, which would have required more difficult valuations and more complex procedures. It was easier to help homeowners if programs did not condition assistance on lengthy certifications or documentation.
While Congress should give agencies discretion, the government should avoid designing programs whose implementation requires many discretionary judgments at the front line about who receives help. That takes longer to get the money out the door, invites second-guessing by those tasked with government oversight functions, and leads businesses and elected officials to lobby the implementers to favor particular recipients. Of course, there may be some moral hazard or distribution of funds to those who may be considered “less deserving” than others, but speed and breadth are more important than precise targeting.
Another lesson from 2008 that applies is to try different policy options. Hopefully enough of them will work. That’s not to suggest contradictory measures should be tolerated; responses need coordination. But with imperfect information, it’s better to do too much than too little.
In addition, there’s the administrative nuts and bolts part of this that’s easy to overlook, but that will determine whether implementation is successful. Congress should provide agencies implementing significant new programs (such as the Treasury Department) with the necessary ancillary powers to get things done quickly. That includes direct authority to hire the necessary expertise quickly without standard government hiring procedures; ability to waive certain federal contracting requirements to expedite purchasing if the circumstances are urgent and compelling; and ability to staff an operation through temporary employees and detailees from other government agencies.
While this is not a financial crisis, at least not yet, it is good that the Federal Reserve is acting to supply greater liquidity to the financial markets. It should broaden those efforts by ramping up more facilities similar to those used in 2008. If this were to become a financial crisis, the government must be ready to stop runs on the system by injecting capital and providing broad based guarantees. Unfortunately, some of the powers used in the last crisis—such as the Federal Deposit Insurance Corporation’s power to guarantee bank liabilities, and the Treasury’s ability to guarantee money market funds—were limited after the crisis. Congress should restore those authorities, just in case they are needed.
Americans will come together and rise to the occasion to meet adversity, just as we have so many other times in our history. But we need honest, credible leadership and sound government action.
Timothy Massad is a senior fellow at the John F. Kennedy School at Harvard University. He was assistant secretary for Financial Stability at the U.S. Treasury Department from 2010 to 2014, and chairman of the Commodity Futures Trading Commission from 2014 to 2017.
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