MNI INTERVIEW: Default Risk Up if Virus Rolls On: Ex-CEA Chair

By Ryan Hauser

     WASHINGTON (MNI) - The U.S. could see a wave of business and personal loan

defaults if the COVID-19 pandemic is not contained within a few months, a former

chair of the Council of Economic Advisers told MNI on Thursday.

     "I would see mortgage defaults, small business loan defaults and credit

card defaults as being the biggest dangers to the financial sector from a

prolonged downturn due to the virus," said Martin Baily, CEA head during the

Clinton administration and now senior fellow in economic policy at the Brooking

Institution. 

     If the pandemic "drags on longer," then "people will stop paying on their

mortgages" leading to problems for the financial industry. A protracted pandemic

would lead to a financial crunch "more like 2009," he said.

     --BOUNCEBACK

     However, "If the virus is controlled quickly, there would be a quick

bounce-back, comparable to what happened in 1980," said Baily, who is also a

senior advisor at McKinsey & Company's Global Institute. He noted, however, that

"the uncertainty is very great" and that "many economists thought there would be

a quick bounce-back after the Great Recession," which "did not happen."

     For now, Baily's view is that the financial sector "is generally in good

shape," and he expects the Federal Reserve and Treasury will be "ready to

provide relief quickly."

     Still, Baily noted that a recession now "looks inevitable" with "at least

two quarters of GDP decline, likely very sharp decline." The equity market also

"seems to be pricing in a deep and fairly prolonged recession," he said, though

he suspects it "has over-sold because of panic" and "was probably too high at

the peak" but "is too low now."

     Administration officials were slow off the mark in addressing the outbreak,

perhaps failing to take in its full seriousness and "now that we are in the

middle of it, it will be hard to offset the downdraft," he said.

     --GIVE CASH

     Baily recommended that policymakers "give money to citizens" and "set up a

fund" in the Small Business Administration for low-interest loans to companies

facing liquidity problems while working with banks to ensure credit for large,

troubled firms (like airlines), perhaps using Treasury back stops for the loans.

     Baily also recommended subsidies aiding sick leave payments and

unemployment insurance made available "quickly and generously," though he noted

that the final price tag on the present crisis "highlights why there should have

been more attention paid to the budget deficit" as the US is "going to add

trillions to the national debt."

--MNI Washington Bureau; +1 202 371 2121; email: ryan.hauser@marketnews.com

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