Opinion - Central Banks

Op-Ed: Central banks' focus on targeted lending policies could limit the pandemic's economic damage

Key Points
  • The European Central Bank will use fresh funds to open its banking system's lending facilities to industries hard-hit by the pandemic, and to help small- and medium-sized companies. That's expected to help stabilize output, employment and consumer spending.
  • Instead of heaping pressure on the Fed to flood the markets with more liquidity, the White House could ask that $1.6 trillion in banks' excess reserves are used to reduce very high interest rates charged for car loans and consumer lending.
  • Beyond those emergency measures, the political leaders of the trans-Atlantic community should realize that strong public health policies are a fundamental input into the economic and political vitality of societies sworn to defend freedom and democracy.
People wearing protective mask walk near Piazza del Popolo during the Coronavirus emergency on Mar. 14, 2020, in Rome, Italy. The Italian government has taken the unprecedented measure of a nationwide lockdown by closing all businesses except essential services such as, pharmacies, grocery stores, hardware stores and tobacconists and banks, in an effort to fight the coronavirus outbreak.
Antonio Masiello | Getty Images

Epidemiologists are waiting for warm and humid weather of late spring and early summer in the northern hemisphere to kill the new coronavirus that thrives on a cold and dry winter.

True to form, economists and head-for-the-hills conspiracy theorists are ridiculing that idea.

I am curious, though, because I believe in science and remember that my flu and respiratory symptoms would instantly get better as soon as my business would take me from New York winters to balmy weather and clean ocean air in Florida or South California.

But I do concede that naysayers are carrying the day by prevailing with monetary quick fixes, even though the financial markets have clearly signaled that pushing more cheap credit into an already liquidity-flooded economy would not spur investments, output, employment, sustainable growth and higher asset valuations.

So, the grasping for elusive monetary nostrums will continue to deflect the voters' attention from the failure of trans-Atlantic public health policies to offer prevention against a pandemic that began its deadly course since December 2019.

An optimist may still ask: Will this pandemic be a wake-up call for political leaders who should know that strong public health policies are essential for a robust, growing and productive labor force? Public health policies are a fundamental input into the economic and political vitality of societies sworn to defend freedom and democracy.

Nothing seems less certain. The European Union rushed last week to show that it spends 37% of its GDP on social protection, health, public services and education. And all that did not prevent a rich community of nearly half a billion people from becoming the pandemic's epicenter — turning to China for help in medical supplies, expertise and technology.

Looking at their overflowing government coffers, Germans are suddenly shocked that they have the largest number of hospitals, and hospital beds, in the EU – but no doctors and nurses to operate that medical infrastructure. A desperate transition from triumphant statements of late February that everything was under control to frightened headlines that Germany should do an Italian-style lockdown

Poor Italians are too sick for schadenfreude, and too generous with virus-fighting balcony serenades. But the exhausted medical personnel is agonizing about "life and death" decisions when rationing the care and respirators to patients. No wonder Rome turned to Beijing for healthcare technology and expert advice, as France and Germany decided to keep their medical supplies for themselves.

France has apparently taken the advice of its scientific community that it is too late to stop the pandemic. As a result, Paris moved to the highest emergency alert to keep the country from total paralysis.

That's what is going on in the EU, nearly a third of world's industrialized economies and a pillar of the trans-Atlantic community.

Luckily, the European Central Bank is there to do the economic heavy lifting while most of member countries' emergency funding goes to keeping their woefully inadequate public health systems afloat.

Instead of cutting interest rates and indiscriminately flooding markets with liquidity, the ECB will use fresh funds to open up its banking system's lending facilities to industries that are hard-hit by the pandemic, and to help small- and medium-sized companies. That's expected to help stabilize output, employment and consumer spending.

The U.S. Federal Reserve could do some of that, too. Only during the reserve reporting period between Feb. 26 and Mar. 11, the Fed has injected a whopping $91.7 billion of new liquidity, raising the banks' excess reserves (i.e., money they can readily lend) by $79 billion to a humongous total of $1.6 trillion.

Instead of heaping pressure on the Fed to do more, the White House should perhaps ask that some of that funding avalanche is used to reduce car and consumer loans from their respective current rates of 5.45% and 10.21%.

By comparison, the Europeans are getting a much better deal. Banks from the ECB's Eurosystem are charging 4.97% for medium-term consumer loans and 1.42% for house purchases.

That's the sort of targeted credit work central banks should do to support the economic activity in extraordinary circumstances we are facing now, while making sure that the soundness of the financial system is not compromised.

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.