More Shock and Awe Stimulus May Be Needed

In an understandable and admirable bid to contain the tragic human toll of the coronavirus economic shutdown, governments and central banks have ended up placing – in Game Theory terms — a large bet on “a single-round game.” That is, they are increasingly wagering that one decisive and forceful set of stimulus and relief actions will suffice to address the disruptions caused by the pandemic. Markets have not only followed suit but now are also running well ahead of this. The hope is that this, indeed, will be the nature of the health shock that has paralyzed the global economy. The worry is that this first round of responses risks ending up being a sprint in what turns out to be a marathon.

Turning our attention first to central banks, it’s almost impossible now to accuse the Federal Reserve of not doing enough to counter the threat of market dislocations that would, in turn, contaminate an already devastated economy. One month into its multi-phase deployment of emergency measures, the U.S. central bank has already gone well beyond what it did during the global financial crisis, both in scale and scope. Its ability to do more is not limited by its balance sheet, notwithstanding the unusual risks it is already taking on. Rather, it may be limited by a backlash that has already started due to the eye-popping numbers involved, including last Thursday’s $2.4 trillion additional package – fueled primarily by the view that it is doing way too much for Wall Street and way too little for Main Street.