- The U.S. Federal Reserve and the monetary authorities in Europe, China and Japan maintain appropriately accommodative credit conditions.
- The current emergency is a public health issue requiring larger government spending and reordering of national priorities. Central banks should step in with additional easing only in cases of weakening economic activity and price deflation.
- China needs massive investments to build a better system of public welfare.
With the yield on the benchmark U.S. 10-year Treasury note falling half a percentage point in the last month, the markets have given themselves a huge investment return and much cheaper credit costs.
The Federal Reserve has been cooperating, too. From September through the end of February, the Fed has injected $236.1 billion of fresh liquidity. That has helped to keep an extraordinarily liquid interbank market, with excess reserves (i.e., the money banks can readily lend) rising, over the same period, by $192 billion to an astounding total of $1.5 trillion.
Are the banks lending? Yes, big time: their consumer loans in the year to the fourth quarter were growing at an annual rate of 6%.
Should the Fed be flooding the market with more liquidity?
The answer is no. In my view, the Fed should now focus on a vigilant oversight of the banking system it supervises and regulates.
The European Central Bank and the Bank of Japan need no prodding to speed up the liquidity deluge of the euro and yen markets. They are doing that already.
China's central bank has also been easing credit conditions to help its epidemic-stricken economy.
A more general point here is that central banks should not be the first line of defense to a medical emergency. That is primarily an issue for public health authorities. Depending on the nature and scope of the crisis, their intervention may require larger public outlays and a reordering of national priorities.
Beyond that, central banks should step in only if the health care problem threatened to depress economic activity to the point of causing a price deflation.
At the moment, the U.S. is very far from that.
Europe, however, is a different case. The rapidly spreading viral epidemic looks like a coup de grâce to an already stagnating European economy.
But sadly, there is no coordinated action of EU member states to face this serious public health emergency. Italy seems left alone to struggle with rising cases of deaths and infections. France is getting ready to set up its own defenses, while Germany, distracted by leadership fights within a moribund governing coalition, triumphantly declares that the viral infection is "under control."
The World Health Organization is probably reassured to hear that there was at least one of its major member countries to which its "very high" risk assessment does not apply.
And if Germany says that it's got things under control, it means there will be no coordinated EU action that might require asking Berlin for financial contributions.
Imagine, for a moment, that Washington took a cue from Germany's improbable self-assurance to calm down Wall Street by organizing a credible global response to the rapidly spreading epidemic.
China would probably welcome that, especially if it got kudos for its efforts instead of what Beijing calls "a smear campaign against China."
After an interlude of 11 years, I returned to China and visited a relatively small city in early December of last year. The progress I saw was quite impressive: an example of a well-functioning modern infrastructure and glimpses of a prosperous middle class in a country that moved 13% of its impoverished rural dwellers to a completely new life in urban areas during the ten years to 2018.
That alone shows the magnitude of China's public health challenges. And then think of an overwhelming issue of lifestyle hygiene presented by more than 370 million of the Chinese population still living below the poverty line of $5.50 a day.
There is every reason to believe that this huge health crisis is a big wakeup call for China. The blame game is apparently under way. Beijing understands that it urgently needs to move along with massive investments to build a better system of public welfare.
It greatly matters to the world that China does that as soon as possible. China accounts for 35% of world's industrial economies and conducts more than $1.2 trillion of trade business with the United States and the European Union.
Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.