House Speaker Nancy Pelosi (D-Calif.) describes her current work on a legislative response to the coronavirus crisis as “Phase Four.” This is misleading. There is no grand tactical initiative unfolding in Congress, bill by bill, as leaders seek to address new stages of the disaster.
What Pelosi wants, and what seems to be taking place, is a do-over. The bill that she and Senate Majority Leader Mitch McConnell (R-Ky.) rammed through last week misjudged both the nature and scope of this calamity, and failed to offer anything approaching an adequate remedy.
We know last week’s bill was bad because Pelosi felt the need to begin writing another one almost immediately. And the economic numbers we have received over the past week are indeed harrowing. Over the entire course of the Great Recession, notes economist J.W. Mason, the unemployment rate increased 5.5%. Over the past two weeks, it has skyrocketed 6.5%. Ten million Americans have been laid off in less than a month. We are almost certainly experiencing the highest unemployment rate since the Great Depression at this moment ― the official numbers just aren’t in yet ― and the crisis is still accelerating.
That Pelosi is, at least, going through the motions about doing something is good news. McConnell let the Senate take a vacation after passing last week’s bill, and currently does not plan to return to work for three weeks.
The bad news is that what Pelosi and the Democratic Party leadership are calling “Phase Four” looks like a bunch of warmed-over agenda items from the last 5 years.
After Democrats won a bunch of wealthy suburban districts in the 2018 midterms, party leadership began prioritizing a big tax cut for upper-middle-class homeowners. It’s a rather strange about-face from the posture Pelosi took last month, when any aid had to be ”targeted″ to the families who needed it most. We’ve moved from making sure no $1,200 checks go out to families with six-figure incomes to funneling aid directly to Lexus Democrats in just a few days.
House Democrats followed this galaxy-brainer with a press conference on infrastructure spending. Let’s be clear: Infrastructure spending is important. This is exactly the right time for a bold, multi-trillion-dollar initiative to revamp America for the 21st century and restructure supply chains so that we actually make things in this country again. It’s time for new agencies and new ideas ― new Tennessee Valley Authorities and Works Progress Administrations and plenty of sledgehammers for the corporate juggernauts standing in the way.
Instead, Democrats talked about targeting the most efficient upgrades for roads and bridges, $10 billion for community health centers and $40 billion for clean water upgrades.
All told, the Democratic proposal comes to $760 billion over five years, which is serious money in normal times. But it’s less than half the size of a vague proposal President Trump floated on Twitter last week, and it’s nowhere near what will be needed to counter the economic hurricane now hitting our shores.
Americans aren’t used to their politicians throwing around trillion-dollar bills, but we have entered a multi-trillion-dollar downturn. Morgan Stanley estimates that the U.S. economy will shrink by 24% this quarter ― an unprecedented decline ― while Goldman Sachs thinks it will be more like 30%.
And these dire predictions are likely evading the truly bad news. State budgets are about to collapse as tax revenues disappear. People who don’t have incomes can’t pay income taxes. And without revenues, states will slash spending, which means firing people. We’re at double-digit unemployment right now, and state and local government austerity hasn’t even kicked in yet.
Thus far, Wall Street’s woes in this crisis have come from without. The coronavirus hit to the real economy is putting pressure on the financial sector. But there is a phase of the crash coming in which Wall Street’s problems will rebound back out into the real economy, in a replay of the 2008 financial crisis.
A year ago, financial watchdogs were sounding an alarm about escalating levels of shoddy corporate debt ― even JPMorgan Chase CEO Jamie Dimon joined in. This bubble ― $10 trillion by some estimates ― will almost certainly burst in the current downturn. Credit rating agencies are downgrading massive quantities of corporate debt, in many cases for retailers that seemed perfectly healthy only a few weeks ago.
When this corporate debt gets cut to junk-bond status, massive pension funds and hedge funds and other investment vehicles will be forced to dump them ― either for matters of professional dignity or because the law forbids them from owning junk bonds. Even the Federal Reserve’s massive new emergency lending facilities require firms to post investment grade securities as collateral ― no junk bonds allowed.
This could easily spark a panic in its own right. But there will still be another shoe to drop when corporate debt blows up. Thanks to a loophole banks managed to work for themselves in the 2010 Dodd-Frank regulations, we don’t really know how much the biggest banks have been betting on these debt securities through offshore accounts.
The Obama administration belatedly tried to address this problem in late 2016, but the Trump-appointed regulators have let it slide. In the 2008 crash, junk mortgages were only a small fraction of the financial problem ― a pile of other bets on those mortgages in the derivatives market were what brought Wall Street to its knees. And we have no idea what American banks have been betting on corporate debt in the years since.
In other words, we’re about to experience something the United States hasn’t been through since the Great Depression. And a few weeks into that, we may well layer a second Great Recession on top of it.
You can’t fight that with some checks in the mail and infrastructure week. You have to rethink the American economy, and fight for a vision of a different future. The moment demands a New New Deal for the 21st Century. Or at least, leaders who know how to govern.
Instead, we have House Democrats ― quite literally the only game in town right now. Their ideas may be bad, but at least they show up for work.
Zach Carter is the author of “The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes,” available now for pre-order from Random House.
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