Transmission Failures Will Sharply Limit the Impact of the $2.2 Trillion Stimulus

By John Banks

In the halls of Congress in Washington, D.C., there is already talk of another mega-sized rescue package. This one could be heavy on infrastructure, or so the rumors go. Depending on how things play out, this new package could land in another month or two.

On a more immediate note, Treasury Secretary Steven Mnuchin wants to add $250 billion to the $350 billion allotted to small-business loans. Senate Majority Leader Mitch McConnell backs the idea.

Congress wants to spend more money, and the first round of money hasn’t made it through the door yet.

This is not good news. Congressional willingness to up the ante is testament to the smallness of the plug, relative to the largeness of the hole.

Economic policy advisers these days are like police chief Martin Brody in the movie Jaws, staring into the water and saying: “You’re gonna need a bigger boat.”

In almost every circumstance, $2.2 trillion is an insanely large amount of money.

But when you are trying to patch up a $21 trillion economy in which millions of businesses have been placed in a medically induced coma — there are more than 30 million small businesses in the United States — $2.2 trillion looks small.

Another big problem is that, when dealing with a real-economy crisis — where tens of millions of businesses and workers are in trouble, rather than Wall Street and the big banks — it is wickedly hard to get rescue funds into the hands of the people who need it.  

In a financial crisis, the big players all know each other. The Federal Reserve pumps a bunch of liquidity into the system, bailout money flows to a series of accounts on speed dial, and apart from the political optics, that’s pretty much it.

In a real-economy crisis, the logistics are far more daunting. The sheer number of entities that need emergency help, when workers and businesses are counted, balloons into the tens of millions.

With that kind of caseload, it’s little wonder the $2.2 trillion is already getting jammed up.

“The administration is under immense pressure to get the money out into the economy fast,” the Washington Post reports, “and fears about the government response are mounting.”

According to a survey from the National Federation of Independent Business, the Washington Post adds, about half of all small businesses face the prospect of closure over the next two months.

That is an incredible 15 million businesses in the United States. Fifteen million business owners, wondering if they’ve got eight weeks. And many of them “can’t get through” in the literal sense of the phrase. Help lines are busy, calls are not returned after dozens of attempts, and websites crash or freeze.

The volume is too much, the system isn’t built for it, and the banks don’t know what to do, either. Everything in the system as it currently stands is geared towards helping the relatively small number of “big guys,” not millions upon millions of “little guys.”

This is why, to some degree, the size of the rescue package almost doesn’t matter. No amount of water will put out a house fire if you can’t move the water through the hoses fast enough.

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Or, to put it another way, imagine a brand-new hospital with a thousand beds and the latest equipment and a supply room full of medicines. Without expertise to run the machines and deliver the medicines, this hospital cannot save people.

In addition to equipment, beds, and medicine, you need human expertise. You also need systems and processes, tried-and-true ways to handle a large volume of patients when every bed is in high demand.

When it comes to rescuing the real-economy — the lifeblood of Main Street, as opposed to Wall Street — the government doesn’t have any of this. There is no real expertise, no knowledge, and no apparatus for helping individual workers and small businesses, as opposed to big banks and big corporations.

The government has ample experience with bailouts, but again, these bailouts are mostly aimed at connected players.

Then, too, the Federal Reserve is good at pumping huge volumes of credit into the system, which is why they were able to ramp up instantly in recent weeks. All they had to do was dust off some of the old “alphabet soup” funding programs that were built in 2008, and soon enough the Fed was buying $70 billion worth of government securities per week.

But that’s all Wall Street stuff. The Fed, like the government, has no natural transmission mechanisms for helping small- to medium-sized enterprises, the backbone of the real-economy.

Even the structure and design of the $350 billion rescue program is an issue, because it is geared toward a sophistication level that many business owners don’t have, with stipulations they can’t meet.

It keeps coming back to the real-economy. The very idea of a corporate loan, obtained via byzantine paperwork and a one-on-one relationship with a bank, is alien to many if not most small businesses.

There are a great many businesses in the United States with 20 or fewer employees, for whom their most advanced finance trick is a vendor credit line or personal credit cards as a back-up.

These businesses have no idea how to tap a loan backed by the federal government. And the banks are making it hard too, because they don’t know how to make it easy.

Commercial and retail banks are in the business of scrutinizing potential borrowers, taking a hard look to see if the borrower is a good credit risk or not, and then lending selectively rather than en masse. These banks also have potential legal liability if they lend to a business that represents a poor credit risk.

Such rules are fine in normal times. They help protect the bank’s reputation and margins and shareholder capital. In a time of emergency, however, when the goal is to get as much money into as many hurting hands as possible, the rules are flow-stoppers that jam up the pipes.

There is also a volume issue. If you ask a commercial bank to increase the volume of its lending by 10X to 100X — to suddenly lend at a scale and speed orders of magnitude bigger than it has done before, largely to a class of customers it has ignored — there will be immediate jam-ups.

There are other problems at nearly every level of the $2 trillion stimulus bill, even the parts that sound good on paper.

For example, take the noble idea that a business should keep its employees on the payroll to get its loan forgiven. What about all the hidden costs a business has to carry with no revenue coming in?

What if the shutdown goes beyond eight weeks? What about inventory that is perishable or technology goods that become obsolete? What about supplier contracts?

The problem is huge on multiple fronts.

First, the government would need many more trillions just to truly address the dire shortfalls created by business stoppage — all the ways businesses are in dire straits because their revenue has disappeared.

Second, even if the stimulus bill was three times larger, or if Congress enacted a $4 trillion follow-up, the mechanisms still don’t exist for dispersing these funds logically, quickly, and efficiently.

Third, the country’s banks are not set up for this job: They are built to lend with caution, not to lend at blazing-fast speeds. They also might need to aggressively scale their staff, and upgrade their software systems to boot, to have a chance of moving quickly enough

All of these transmission problems fall under the category of nonlinear dynamics — the type of hidden issues people don’t think about, which is why most investors (and politicians) are not focused on them.

In part, it’s like the difference between designing a widget and figuring out how to manufacture, distribute, and sell a billion units of that widget while earning a profit. The scale-and-distribution aspects are a much, much harder puzzle to solve than designing the widget in the first place.

The deep structural realities of this ongoing real-economy crisis, and the failure of stimulus to easily or quickly address them, also helps explain why we are so deeply skeptical of the notion that “the market has bottomed.”

The real economy has way too many severe problems, as yet nowhere near fully addressed, to take a relaxed view of where things are going. And the real economy is the economic backbone of the country.

To put it another way, the question is not “how soon can the S&P get back to new highs” in our view, but rather, “can we triage the patient in such a way that the S&P avoids revisiting the 2009 lows.” The answer is yes, but only if we get moving.

This isn’t a time for unbridled optimism, in other words. It’s a time for courage, focus, and resolve.