Book publishers must be hard at work preparing post COVID-19 editions to classic economics textbooks. They need to update students on the economic policies and best practices that are evolving in the fight against economic meltdown.
The interconnectedness between politics, sociology and economics is revolutionising the way that political and business leaders are interacting to save the world from a systemic socioeconomic collapse.
The failure of European political leaders to put economic and social integration on top of their priority list when meeting to define a plan for the recovery of European economies after the pandemic must come as no surprise to anyone who understands how the EU works.
Once again, the EU will have to rely on supranational institutions like the European Central Bank to limit the economic damage that the pandemic will inflict on European communities. But this will come at a high fiscal and political cost.
After some hesitation, the ECB has decided to put its mandate of preserving price stability in the EU. It emulated the US Federal Reserve by announcing a major buying spree of debt of ‘fallen angels’ – sovereign and corporate debtors who see their credit rating fall below the investment grade level. Were it not for this extraordinary generous quantitative easing, the equity and debt market in Europe would be in a much worse position than it already is.
Bailouts with taxpayers’ money were the corrosive irritants that made many politicians and ordinary people so hot under the collar in the last financial crisis. Banking regulators insisted that never again should taxpayers have to rescue banks that had mismanaged their business. But the concept of bail-ins was never popular as small investors and savers were pushed to the front line of fire when their banks became insolvent.
Thousands of inexperienced small investors have rushed into this high-risk market in a fit of desperation
Now the ECB had to revise its strategy by bailing out large and small businesses that risk failing as a result of the economic meltdown. Bailing out companies on a large scale by buying their debt is not really the job of a central bank. The ECB will print as much money as is needed to prevent fallen angels giving up their soul, but the cost of this strategy is to create zombie equity and capital markets.
Mohamed El-Erian, Allianz chief economic adviser, believes that the Federal Reserve and the ECB expanded quantitative easing is fuelling even more moral hazard. Debtors and those who are prepared to lend them money do not have to worry about the cost of risk as eventually they will be bailed out by taxpayers through EU institutions. We are moving from the concept of what to do with zombie companies to accepting that we are increasingly getting used to living with zombie capital and equity markets.
Of course, at a time of crisis like the one we are passing through, monetary and fiscal policies that throw prudence to the wind do not bother policymakers all that much. Keeping afloat at whatever cost is better than drowning. The issue of how we have to repair the damage resulting from the failure of political leaders to do what it takes to ensure that economic blueprints are sustainable can wait.
The day of reckoning will have to come. The global debt mountain amounts to three times the global GDP. It will increase substantially by the time the pandemic is over. The fiscal incentives introduced by governments in the form of loans to small and large business will more than likely result in bad debts. Banks will then resort to claiming under the guarantees they received from the government. Taxpayers will be the ultimate losers in this sad saga.
The high-yield bond market is also a threat to our own financial well-being. Thousands of inexperienced small investors have rushed into this high-risk market in a fit of desperation caused by low interest rates. There are already some who are urging the government to bail out companies with high-risk business models by buying their junk bonds.
Future economic and business models have to be built on an understanding of the validity of solid capital bedrocks for businesses, fiscal rectitude that encourages the prudent use of taxpayers’ money and an appreciation of the dangers linked to excessive borrowing.
Today’s EU political leaders prefer to engage in short-term damage limitation when a crisis erupts rather than make tough decisions to underpin their economic plans with solid economic fundamentals.
Unfortunately, ECB intervention will never be enough to prevent another economic meltdown.