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As COVID-19 Outbreak Worsens So Does Economic Volatility


The short-term economic damage of the pandemic is obvious and enormous. What about the longer term? Economist Carmen Reinhart has been giving that some thought. She is a professor of economics at Harvard's Kennedy School of Government, and she is on the line. Good morning.

CARMEN REINHART: Good morning.

INSKEEP: I just want to note Thursday was the worst day on Wall Street since the crash in 1987. And then yesterday, Monday, was an even worse day in percentage terms. How does this decline compare to that one, which I believe you remember?

REINHART: Well, look - the causes are so different. I am more worried about this one because the surrounding economic disruptions are something that I do not - I cannot find a historical counterpart to.

INSKEEP: Good point. Because in 1987, there was a problem on Wall Street; there was a crash, but the overall economy remained strong, and the recession didn't come for some years after that. Now everything is seizing up. That's what you're saying, right?

REINHART: That's exactly what I'm saying, and there's really no historical template to compare it to.

INSKEEP: Well, let's see what we can see of the near future here. The president has insisted this will pass, and that is true in pandemic terms; eventually, the disease will die down one way or another. But can things just snap back economically in a few months?

REINHART: I have my doubts. I think that on the supply side, we have seen significant damage to global supply chains. I think that the longer this standstill goes on, in distancing and closures and so on, the more likely that this begins to morph what - it did not start as a financial crisis, but it could morph into one. I do expect business bankruptcies and corporate defaults. And so the longer this goes on, the less likelihood (unintelligible).

INSKEEP: Oh, well you might have - that's a good point. You might have a perfectly fundamentally sound business, but you can't pay the bills in the short term and you go bankrupt, or you could be an individual in that same situation, which raises a question that people are wrestling with, Ms. Reinhart - can the economy itself be paused? For example, there's talk of finding some way that people can hold off on their mortgage payments so they don't lose their homes. Is that sort of thing possible and practical?

REINHART: Well, look - moratoriums on debt are very rare. You know, we had the Hoover Moratorium in 1931 for sovereigns. But at the more, you know, microlevel, at the household level, at the corporate level, they're much - they're a rarity. But this whole situation is a rarity. I do think, however, that also one way to deal with that is to establish lending facility for the banks that are holding the distressed loans and keep them afloat until activity resumes.

INSKEEP: Meaning that the banks would hand over the mortgage portfolio to somebody else or the business loans?

REINHART: Basically, look - the Federal Reserve cannot buy distressed loans. But however, it can make lending - it could do the lending to the banks that hold the loans and package the distressed loans as collateral.

INSKEEP: OK. A glimpse at a few of the possible next steps from Carmen Reinhart of Harvard's Kennedy School of Government. Thank you so much for taking the time.

REINHART: You're welcome. Transcript provided by NPR, Copyright NPR.

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