Trillion Dollar Triage

INTRODUCTION

Over the weekend of February 22, 2020, Saudi Crown Prince Mohammed bin Salman hosted the finance ministers and central-bank governors from the Group of Twenty nations, a forum for the leaders of the world’s largest economies. The prince was eager to use the event in Riyadh to showcase his country’s modernization, although the progress was relative; one of his most radical steps was allowing women to drive.

The summit featured icons of Saudi culture—which explains how Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin each ended up donning a leather glove and posing with a gray feathered falcon, Saudi Arabia’s national bird. The most powerful players in the global economy also held up their iPhones to video a white camel parading through a palace courtyard. The animal, named Most Beautiful Camel at the annual King Abdulaziz Camel Festival, had won hundreds of thousands of dollars based on criteria such as hair color and lip plumpness. Powell’s colleague at the Fed, governor Randal Quarles, and François Villeroy de Galhau, governor of the Banque de France, snapped a photo together in front of the mammal.

The trim, silver-haired Powell, who had spent his career at top-flight law firms, investment companies, and as a White House appointee, moved comfortably in these rarefied settings. He had survived a tumultuous first two years at the top of the Fed, earning the respect of Democrats and Republicans for his levelheaded leadership in the face of constant attacks from President Donald Trump. By most metrics, the US economy he was responsible for monitoring was in very good shape after the central bank had shifted from raising rates in 2018 to cutting them in 2019, a humbling U-turn. But the conference’s luxuries and cultural trappings offered just a temporary distraction from unsettling news about a virus that had recently emerged in the Hubei province of China.

That weekend, the novel coronavirus had gone viral, with outbreaks now multiplying in Iran, South Korea, and Italy. In Riyadh, there was little opportunity for Powell or other global economic leaders to officially discuss global responses to the virus—the summit had been planned down to the minute many weeks earlier. Talk on the sidelines of the conference, however, quickly turned to how northern Italy was sealing off eleven towns inside a quarantined zona rossa, or red zone, enforced by military police. Major events such as the Venice Carnival were being canceled. Guests didn’t know what to think—it all sounded like something out of The Andromeda Strain, the 1969 Michael Crichton techno-thriller about a deadly rogue pathogen from outer space. Would it be a worse repeat of the 2003 SARS outbreak, which killed hundreds, primarily in East Asia? Or something more serious? Over 2,300 people had already died, almost all of them in China.

Powell—who was not trained as an economist—had spent hours poring over economic papers and textbooks when he first joined the central bank in 2012 so he could take part in monetary debates. In recent weeks, he had added the latest epidemiological research to his evening reading diet. There were still more questions than answers—the virus appeared to be less lethal than Ebola or SARS, but it was extremely contagious.

In Riyadh that weekend, Powell walked away from a private meeting with Lee Ju-yeol, the head of South Korea’s central bank, struck by Lee’s firsthand report over the stringent public-health measures already being deployed in South Korea to prevent outbreaks. Not good, thought Powell. Until then, Powell shared the consensus view that the virus might sap Chinese demand and roil supply chains for a couple of quarters, denting growth in Asia, but it would not be memorable for the United States. The previous week, for example, Apple had announced it would miss its quarterly sales goal because of chaos caused by the coronavirus in China. Unfazed investors sent the tech-heavy Nasdaq stock index to a record high the following day.

When it was his turn to address the international delegations, Powell slapped a huge disclaimer on his cautiously positive outlook. “I hold these views with very, very low confidence,” he said, “and I’m really wondering whether they’re right at this point.” His private remarks would have been especially notable if they became public because the Fed leader’s words can cause huge, nearly instantaneous drops in investor confidence and stock markets.

Officials from Hong Kong and Singapore—areas that had been heavily affected by similar earlier viruses—skipped straight past standard monetary-policy measures and discussed extensive, much more radical, fiscal measures, such as income-replacement programs, that were being rolled out to defend against the virus’s disruptions. It was a wake-up call for Western financial officials.

On his last day in Riyadh, Powell began to think it was only a matter of time before virus clusters would multiply through US cities. He called his colleagues at the Fed. “What capabilities are available to the Treasury to do anything specific about this?” he asked. “And by the way, what authorities do we actually have?”

During the previous year’s trade war, Trump had come up with a farmer-bailout program that ultimately directed nearly $25 billion to offset losses in exports. Was there a similar way for the Treasury Department to quickly make government payments available if American cities had to start shutting down commerce to stop the spread of the virus?

During a television interview from Riyadh on Sunday, February 23, Mnuchin, a former partner at Goldman Sachs with jet-black hair and black-framed eyeglasses, said there was “no question” that the US government had a backup plan to deal with a contagious virus, but he also said it was too soon to say what that would entail. “In another three or four weeks, we’ll have much better data,” he said. “I don’t think people should be at the point where they’re panicked. On the other hand, it is concerning.”¹

On Monday, February 24, Powell climbed on a jet for the flight back to Washington, DC. In 2018, he’d been asked at a forum if he slept well at night. “No one wants a central banker who sleeps well,” he joked. “What good is that?” But there wasn’t much he could do for the moment. He switched off his phone and settled in for the fourteen-hour flight.

When the plane touched down at Dulles International Airport outside Washington, Powell switched on his phone. The news was all bad. Italy and South Korea had announced more deaths. Additional countries were imposing travel restrictions. The Dow Jones Industrial Average had tanked, falling 1,000 points. The Centers for Disease Control wasn’t calling it a pandemic yet, but the markets were treating it like one.

There are two sides to Powell’s job. One could fairly be described as boring—regulating banks and the supply of credit to keep the economy growing steadily. These decisions on dry monetary policy, however, can have tremendous influence over people’s lives. Setting the price of money influences the prices Americans pay on their credit-card balances, their car loans, their mortgages. Changes in the prices of stocks and bonds can influence how much large and small companies are willing to hire, invest, and save.

The other side of his job is harder to quantify: maintaining confidence in the financial system. In a few hours on that Monday, investors had erased the Dow’s gains for the year to date. The Fed’s job, of course, isn’t to respond to normal ups and downs in markets. But when investors and corporate finance chiefs are forced to make very sudden changes in their investment plans, the risk of a market crack-up or panic soars. In late February, those risks accelerated. The Federal Reserve had been created 107 years earlier to prevent a rerun of debilitating banking panics by serving as a lender of last resort—a role that it had embraced during the Great Recession of 2008.

Even with interest rates at historically low levels, that episode illustrated how Powell had plenty of tools at his disposal. He led an institution with almost magical powers—lending money that it creates out of thin air. American presidents can order troops to war and a midnight air strike, but they can’t spend $1 trillion unilaterally. The Fed can.

At the same time, politics, monetary theory, and decades of Fed history meant that Powell’s job wasn’t as simple as pointing a money hose at a problem. The central bank can help boost demand when the economy slumps; there was no precedent for what policymakers would soon face—the equivalent of an economy placed into a medically induced coma. And rash action risked panicking the markets further. As he disembarked from the plane, Powell already knew one thing: doing nothing was not an option.

The next day, Dr. Nancy Messonnier, director of the CDC’s National Center for Immunization and Respiratory Diseases, offered an austere assessment of the public-health situation. “It’s not so much of a question of if this will happen anymore, but rather more of a question of exactly when this will happen and how many people in this country will have severe illness,” she said at a press briefing.²

Messonnier described how she had told her children that morning about the potential for severe disruptions to everyday life, including school closures and telework, and she calmly advised Americans to begin preparing for similar “significant disruption of our lives.” Unnerved by the candor, the Dow dropped another 879 points on Tuesday.

The White House continued to deny that the virus would have much impact. That same Tuesday, February 25, after two straight days of a plunging Dow average, Larry Kudlow, Trump’s director of the National Economic Council, appeared on CNBC. Fed governor Lael Brainard, at a conference in Amsterdam, caught part of the interview. Kudlow had just walked out of a meeting with senior health advisers and thought he was simply reiterating the points they had covered. “We have contained this,” Kudlow said from the briefing room. “We have contained this—I won’t say airtight, but pretty close to airtight… I don’t think it’s going to be an economic tragedy at all.”³

Brainard couldn’t believe what she was hearing. Oh my God, she thought. These guys think this is all about the stock market. They just don’t get it.

The next morning, President Trump fired off a tweet blaming cable news for overhyping the “Caronavirus” and panicking markets. Then he called Powell to tell him how big a loser he was. The dollar had strengthened over the prior week—as it usually does when investors get nervous about financial volatility. The strong dollar was killing the United States, Trump said.

The president envied negative interest rates in Germany and incorrectly believed that if the US had negative rates, he could call due existing Treasury debt, like the mortgage on a hotel, and replace it with new, negative-yield debt. After decades in real estate and three years as president, Trump still didn’t understand the difference between public and private debt. Trump told Powell the Germans were laughing their heads off at the Fed chief. “They think it’s so funny that you don’t understand any of this, how they’re picking our pockets because of you, and they tell me this personally,” Trump said to the man he had put in charge of the central bank two years earlier.

On this and other occasional calls, Trump would also refer to the CEO of Caterpillar, the giant maker of construction equipment and engines, who, the president alleged, had said the Fed was the reason the economy was not growing faster. After Trump first brought up the company, Powell read Caterpillar’s earnings reports and found no such mention of the Fed or a strong dollar. But with Trump, reality didn’t matter.

Powell summoned the discipline that had served him well over the past year of similar outbursts. The only promise I can make you, Powell would offer politely, is to do my absolute best for the people that we both serve. He pledged that the Fed was devoting lots of thought and analysis to what was happening, and that it would use whatever tools would be needed. Trump’s public threats and needling would soon be the least of Powell’s worries.

At 10 a.m. Wednesday morning, Powell and a dozen Fed officials convened their first Covid-19 crisis-planning meeting in a wood-paneled conference room on the fourth floor of the Marriner S. Eccles Federal Reserve Board Building overlooking the National Mall. The Fed had already put in place certain safeguards, such as quarantining paper money returning from Asia just in case it might spread the virus. The discussion turned to what might happen to the US economy if and when the virus arrived.

At the time, the Fed was preparing for a one-quarter slowdown. Officials could see anecdotal reports that foot traffic at shopping malls was declining. It seemed likely that air travel and hotel bookings would soon follow. But they believed the economy—then in the middle of the longest continuous expansion since the Civil War—could still avoid a recession. It was a classic case of the human tendency to absorb big news slowly. What’s more, none of the experts around the table had any historical context for what happens when a $20 trillion economy shuts down, either voluntarily or by government decree.

Powell, who sat at the head of the conference room, had encouraged his board members to ignore received wisdom and economic orthodoxies. He turned to Vice Chair Richard Clarida and pressed him for his worst-case scenario. “Don’t tell me what’s plausible,” said Powell. “What’s the real worst case?”

“Well, Jay, if we become Italy, and we shut down the entire economy, then this will be a bigger hit than the Great Depression,” Clarida said.

The names of Fed chairs are often well known—Paul Volcker, Alan Greenspan, Ben Bernanke, Janet Yellen—but the central bank’s leaders operate mostly in the background, giving bland speeches in drab hotel ballrooms to chambers of commerce and economics clubs, away from the harsh political glare bathing other institutions such as Congress and the Supreme Court.

There are certain moments, however, when the Fed sheds those reservations and becomes what is tantamount to a fourth branch of government. In crisis, the Fed chair’s words are more closely watched by global money managers and CEOs than anyone else’s in the world, including those of the US president. On the precipice of catastrophic financial meltdowns, the normally staid and predictable Fed can move faster and more powerfully than any other arm of the government.

The Pandemic Crisis would be one of those moments.

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