[Exclusive] Market Panic Has Yet to Peak; Trump Faces Big Test, Harvard Economist Says
Ge Weier
/SOURCE : yicai

(Yicai Global) March 19 -- The Covid-19 epidemic and the economic situation both took a turn for the worse in the US in the past week. Stocks, crude oil, government bonds, and gold have all suffered mass sell-offs, and investors are worried that the pandemic may tip the US economy into recession.

The Dow Jones Industrial Average had fallen below 20,000 points as of yesterday's close, and has dropped more than 30 percent in the past month. The US stock market tripped a first-level circuit breaker for the fourth time within two weeks, and only the fifth time since the mechanism activated in 1987. The yield on the 10-year US Treasury note climbed to 1.226 percent, but at one point fell to 0.65 percent on March 16. The WTI crude oil futures prices closed down 24.4 percent at USD20.37 per barrel, its lowest since February 2002, and the cumulative decline this month has reached 54 percent. The Chicago Board Options Exchange's CBOE Volatility Index hit a record high, surpassing that of the financial crisis. The cumulative number of confirmed cases in the US reached 6,496, with total 114 deaths as of yesterday, according to statistics from Maryland's Johns Hopkins University.

Though the ongoing crisis is similar to the financial crisis in terms of development speed, the former stems from a public health system crisis triggered by a pandemic and the current shock to the US economy and capital markets is a result of anti-epidemic policies, Paul Sheard, a senior fellow at Harvard Kennedy School's Mossavar-Rahmani Center for Business and Government and former vice chairman of S&P Global, said in an exclusive interview with Yicai Global.

Yicai Global: The US epidemic and economic conditions are taking a turn for the worse, and we can almost see new bailout operations from the Federal Reserve and the US Treasury every day. Has this already matched the 2008 financial crisis?

Sheard: I would say that the situation now is changing so rapidly that we're getting news from the Federal Reserve and Treasury almost on a daily basis, which is unthinkable, so how do you compare this to the years during the financial crisis? I think it's very analogous to the financial crisis in terms of the speed with which developments are happening. I was the chief economist of Lehman Brothers, and I still remember those frenetic days. I don't think it's quite yet at the peak of fanaticism, if you like, but it reached it in 2008, but it is certainly evolving.

Obviously, there are some key differences. I think what is sort of unique about this crisis  [is] really kind of two things. One is that obviously it's a pandemic, it's a public health issue rather than a financial crisis. The second unique factor is that much of the policy response to try to deal with one problem, the public health issue, the threat to public health, is really the primary driver of the economic and the market disruption. In some sense, I guess, a kind of necessary evil that the government on behalf of society is having to pay to deal with the underlying fundamental problems.

Yicai Global: Do you think market sentiment has yet to reach the peak of panic?

Sheard: So that gives while the atmospherics are a little bit and similar [as is] the underlying structure of the problem. So the speaking is quite different from 2008. Now in terms of what to expect from here, again, if you went back to 2008, 2009, for example, this commercial paper funding facility at that time was announced on Oct. 27. That was still quite early. A lot of things happened after that, so it's difficult to say exactly how this is gonna play out. Absolutely I would be expecting that we're still in the early days of this process.

We're gonna see more government and central bank policy responses than these before we're out of the woods.

Yicai Global: On a level of one to 10, how do you rate the possibility of this public health issue dragging the US into an economic crisis or recession?

Sheard: I think we are already probably around a seven or eight. There's a very high likelihood that we're having some kind of economic crisis.

Given the consumption of something like 70 percent of the economy, the risk tends to be quite dramatic. And I think that policy makers are kind of taking a bit of a gamble at the moment that these will be short, sharp, drastic measures that will address the underlying problem, and then the economy can get back to normal, but if it turns out that the virus keeps spreading, I think some quite difficult political decisions have to be made. And we are in an election year. This is clearly gonna be a very big test for President Trump's leadership, a lot is at stake.

Yicai Global: The G20 was born in the most turbulent moment in the 2008 financial crisis. Major global powers jointly implemented expansionary monetary and fiscal policies to push the global economy out of crisis. How should the international community work together to fight the epidemic since the virus itself is borderless, after all?

Sheard: But the key problem this time is that the government response to the pandemic itself is pulling down economic activity. I think where the first line of coordination needs to be is in terms of the global community coming together to try to figure out [how] to develop a vaccine and how to prevent this from happening in the future, that can be a kind of a global all-hands-on-deck exercise. Beyond that I think that it would be useful and necessary for the different governments to really come together and maybe review a lot of the policy that is being put in place, given that if the global economy goes into a deep recession, that itself will have a lot of negative impacts on people's health. And then I think beyond that, to get to the more traditional macro economic policy responses ... some coordination would probably be good. But we are seeing some of that coordination committee on the central banking side, For example, very quickly, the Fed has put in place dollar swap agreements with the other central banks.

Editor: Ben Armour

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Keywords: Novel Coronavirus Pneumonia , Trump