VIDEO AND TRANSCRIPT AVAILABLE: Stanford Economics & Finance Professors Speak Out on Impact of Congress' Coronavirus Relief Bill

MEMBERS OF THE MEDIA INVITED TO A VIRTUAL PRESS CONFERENCE AND EXPERT Q&A

Wednesday, March 25, 2020, 11 AM EDT / 8 AM PDT 

"Congress must bail out people before large corporations," says a growing list of 80+ leading economists and finance professors from major universities around the country who have signed an open letter to Congress. The authors and representatives of the signers will discuss what’s at stake in the $2 trillion coronavirus relief package, and answer questions about what it does--and will not do--to keep the nation's economy out of recession. 

PANELISTS:

• Anat Admati, Professor of Finance and Economics, Stanford Graduate School of Business
• Jonathan Berk, Professor of Finance, Stanford Graduate School of Business
• Jonathan Parker, Professor of Finance, Massachusetts Institute of Technology Sloan School of Management
• Paul Pfleiderer, Professor of Finance, Stanford Graduate School of Business

The transcript of this expert panel is available below. 

THOM: Welcome to this Newswise Live expert panel here today with a group of economists from Stanford University and MIT.  At about 1 a.m. Eastern today the Senate reached an agreement with the White House on an unprecedented $2 trillion dollar Coronavirus Relief Bill.  The Senate is expected to vote on the bill this afternoon and the bill next moves to the House, where it’s expected to pass and be signed by the President within days.  The stimulus package delivers critical financial support to businesses both large and small that have been devasted by this pandemic, as well as shoring up funds for unemployment insurance and even sending money directly to many Americans.  Here today to talk about the economic impact of the bill we have a panel of experts including economics and finance professors who have written an open letter to Congress, and they have recruited over 100 of their colleagues from major universities across the country to sign it.  A link to that letter can be found in the chat; Helen, if you can add that in there, thank you. Each expert is going to give a brief overview of their analysis of the Bill, and then we will take questions from the media, so media, please enter your questions into the chat so that we can get to those when it’s time for the Q&A.  In alphabetical order, we’re going to hear from Anat Admati, she is a Professor of Finance and Economics from the Stanford Graduate School of Business. We are also going to hear from Jonathan Berk. Jonathan Berk is a Professor of Finance at the Stanford Graduate School of Business. We are also going to hear from Jonathan Parker.  Jonathan Parker is a Professor of Finance from the Massachusetts Institute of Technology Sloan School of Management. And we’re also going to hear from Paul Pfleiderer, who is a Professor of Finance from the Stanford Graduate School of Business. So, thank you to each and all the experts for joining and we’re going to go ahead and get started here with Dr. Admati.  

1. ADMATI: Thank you everybody.  This $2 trillion dollar bill includes $500 billion dollars to loan to companies, states and cities, and $425 billion dollars, guarantees to the Fed, so it can expand massively its lending program and as a purchase program, including buying corporate debt, about $200 billion.  I want to mention here that it took court battles to get information about what the Fed did in 2009 where it committed about $7 trillion dollars in loans to many hundreds of banks. There are amounts of money we will discuss for individuals, but the totals there are smaller than the headline numbers I just mentioned.  This plan is similar to another relief program of this kind in a crisis called TARP, Troubled Asset Relief Program, which focused on supporting banks mostly, over individuals. It allowed the housing prices, the crisis, and the recession to linger much longer than it could have, while the financial firms, as many, many suffered, suffered the least, and their investors suffered the least from the consequences of that recession.  A pandemic is now causing havoc in our lives. Healthcare system is cracking, awful shortages, essential supplies such as tests and masks. People are sick and dying. This bill is sad commentary on the financialization of our economy. Instead of addressing the most urgent issues and directly helping those who need it the most, it prioritizes corporations and their investors, which is deeply misguided policy.  

THOM:  Thank you Professor Admati.  Next, to Professor Berk.  

1. BERK: I was motivated to start this open letter and write an accompanying Op Ed piece, because I felt that the current approach could actually make the problems worse.  Why? Because bailing out corporations is actually bailing out investors. Who cares if we bail out our investors? It’s the taxpayers who pay if we bail out investments.  That means taxpayers are subsidizing investors, we’re essentially moving money from poor people to rich people. In my opinion, that doesn’t make sense. Rich investors are asking their Uber drivers to bail them out.  Bailing out companies is like EMS workers arriving at a car accident and choosing to ignore the occupants and instead spending their time worrying about whether the car is scratched. The car is supposed to absorb the shock of the accident to protect the occupants in the car.  That is the role of investors in a corporation. They are supposed to absorb the shocks, not the workers. So, the letter basically says two things; don’t bail out corporations and help the people who need it directly.  

THOM:  Thank you, Professor Berk.  Next, to Professor Parker.  

1. PARKER:  The main responsibility of our government today has to be to win the medical war against the virus.  This not only saves American lives, but is also the best way to help the economy. However, the war hasn’t gone well at this point and the government does need to spend future tax dollars today to provide disaster insurance now.  But this doesn’t have to go to large firms. In the American economic system large companies that are profitable in the long run go through bankruptcy while continuing to produce and employ Americans. For such companies bankruptcy, as our letter says, is only about  the division of profits between stockholders and bondholders, not about whether the company continues to operate. And transfers and loans to large corporations almost exclusive benefit the stockholders. US stocks are owned by the very wealthiest people all over the world.  This is not the time to be transferring money from taxpayers to the world’s wealthiest people. The $2 trillion dollar price tag for this legislation is about a year’s worth of individual tax revenue. It’s about $24,000 for a family of four when we break it up on a per capita basis.  And yet this legislation only provides a couple thousand dollars to such a ,family. Shouldn’t we be supporting this family rather than the stockholders of the firms with too much debt and too little savings heading into this crisis? I think not.  

THOM:  Thank you, Professor Parker.  We’ll go next to Professor Pfleiderer.  

1. PFLEIDERER: I just want to reemphasize the big picture issue the has been emphasized by others.  This is a huge crisis and our limited resources must be allocated wisely. The billions of dollars of taxpayer money must be directed in ways to meet the most urgent needs.  Dollars that end up in the pockets of corporate investors and create windfall gains are misdirected dollars. They will be happily received by those investors, but keeping these investors happy does nothing to help the millions in our economy who are vulnerable.  The windfall gains these investors receive will not trickle down to those in need. While the proposed legislation does direct some funds to those in need, it directs significant amounts to bail out the airlines and other companies, producing windfall gains for their investors.  Well, we are professors who pay attention to stock and bond prices. We know that the well being of our citizens is not always measured well by what happens in those markets. The government can direct money to investors, and in doing so, increase the value of the bond and stock markets, but this is an illusory gain for the overall economy, especially for those most vulnerable.  

THOM:  Thank you, Professor Pfleiderer.  For media in attendance, please give us your questions, the chat is open.  Down at the bottom of the screen just chat to me or chat to the whole room, and we will relay those questions to our experts.  I have a few questions that we have prepared for Dr. Berk here to start. Dr. Berk, why do you say that bailing out corporations is the same thing as bailing out the investors?  

1. BERK:  Because you can think of a corporation as two pieces.  The one piece is the operating corporation, doing whatever it is to make money.  And the other piece is how that corporation is financed. Okay, when you bail a corporation out, you’re bailing out the people that financed the corporation, you’re not necessarily affecting whether the corporation can operate.  The idea that if a corporation fails, that is, if a corporation goes bankrupt, it will suddenly stop operating, is just fallacious. All of us flew United Airlines for three years while they were in bankruptcy. The biggest problem is it’s confusing those two concepts.  Yes, bankruptcy is about how the corporation is financed, it’s not about whether a corporation can operation.  

THOM:  We have a question from John at Quartz, just to be clear, are you proposing that the stock market cap of these companies be wiped out but the companies be kept alive so that workers still have a place to work when the crisis hopefully passes?  And what would you propose happens to bond holders? Millions of Americans are invested in these companies through 401Ks and pension plans. So it would seem to me that regular people would also absorb that wealth destruction. Dr. Berk, would you like to take that question?  

1. BERK: Yeah, this has nothing to do with the market cap of a corporation.  The market cap of a corporation is a function of how that corporation is doing, and this a very long-term value of the corporation.  So it may be that there are some corporations that are in financial difficulty right now, but they have a very strong future because they’re making products that people are going to buy for a very long time.  So it has nothing to do with the market cap. It’s absolutely true that a lot of people’s pensions plans are invested in the markets. But the point to realize is there are lots of people who don’t have pension plans, and those people are the people most likely living hand to mouth, paycheck to paycheck, and those are the people who are suffering most.  The idea that those people should now have to subsidize the people who have the resources to weather the storm just seems fundamentally unfair.  

THOM:  Another question here from Dionne at Axios, isn’t the worry that the virus crisis turns into a financial crisis and is that worry real?  If that happens, would that make the damage from the virus much was? And doesn’t that justify helping support corporate debt and giving bailouts to corporations?  Dr. Berk? 

1. BERK: No, I think we need to separate the idea.  We already have a financial crisis and we need to separate that idea from the really bad medical crisis that we’re having.  The market is reflecting the fact that investors realize that the virus is going to affect the economy. The way to fix that fundamentally is to fix the virus.  The fact that the market is down is just reflecting the virus, it is not saying that businesses are suddenly in bad shape. The reason businesses are in bad shape is not because the stock market has gone down, but  because the shelter in place orders made it, some, not all, for example, airlines, made it difficult for them to do their business now. And that’s true, but that is not something necessarily has a role to fix. As Jonathan said, the government’s role right now should be focusing on fixing the health problems, not worrying about whether investors in businesses are going to take losses.   

THOM:  Thank you, Professor Berk.  I want to go ahead to Professor Admati for a couple questions and we have from some of the questions that we have prepared, if we don’t bail out the companies, will they fire employees?  Won’t bailouts thus help the employees?  

1. ADMATI:  Well, they might, or might not.  The problem with these so called bailouts or loans is basically a blank check.  So a lot of debate has gone into what targeting you would force to do. In the last crisis banks got a lot of funding without requirement that they restructure mortgages, for example, that they even enter negotiation with mortgages which were already securitized in numerous securities and spread around the world in numerous securities and there was no clear lender.  And many of these were not foreclosed almost intentionally for profit by some companies. So, the notion is that, both about employees and about other counter parties like boards of banks, whoever they are, or other investors, that you want to know where the money is going and giving to corporations, as Paul said, assumes that it would trickle down exactly as the economy needs, which is not really always the incentives of those who control the corporations.  That’s the main problem.  

THOM:  So, supporting the banks, does that help them to make loans to the customers?  That’s the logic, is that something that you believe is sound?  

1. ADMATI:  It can help, it does help, banks have sources of funding, pretty cheap sources, and then they have to make the loans wisely to people, and surely they need to when people are stretched and can’t cover rent expenses or other things.  So definitely that’s true, and the banks have The Fed, The Fed is a little different than the federal government bailouts. And there is a blurry line there, there is definitely a blurry line, because The Fed, as I said, is very opaque and makes a lot of investments that we don’t see.  So, exactly what it does and where the line is drawn is very difficult.  

THOM:  We have a question from Emily McCormick in the chat, she indicated that she is a bank director, and this dovetails with the difference between Fed liquidity support, as well as government bailouts,  and the difference between those things. So, her question is small businesses are particularly impacted by this crisis, therefore does the Bill do enough to help them? And how should support for small businesses be balanced between government agencies like the SBA and the banking industry? 

1. ADMATI:  That’s a great question because I do think small businesses are critically important to help get through this without them totally closing down.  I think Jonathan Parker may know a little bit more about this. My concern there is only that the loans seem to be timed not by the conditions of the crisis, by like four months, and things like that.  It should be more flexible so that as in UK, it’s actually tied to when conditions change enough. Both unemployment insurance and even help to small businesses. I’d like to hear from Jonathan on that.  
2. PARKER: I would emphasize the difference between the small firms and the big firms, which is that large firms go through bankruptcy as Jonathan Berk noted, airlines, multiple times, GM did in the last crisis, we still have GM, it’s working quite nicely, it’s doing, up until the crisis, reasonably well, whereas small firms often do not survive  bankruptcy, unfortunately. It is going to be extremely challenging to get a reasonably clean way of getting funding to a lot of small businesses. The SBA is in a reasonable position to do that. If you contrast the situation with what the Fed was dealing with small banks in the financial crisis, the Fed already regulates small banks, it has in place an insurance program for deposits.  It has a bunch of information on all of these small banks, so it’s feasible to structure a lending program that had a term sheet that was the same for everybody, with hands off and rule based rather than discretionary, and was based on the bank being solvent without the loan, the capital purchase program that was a subcategory of the TARP lending. I don’t see an easy way to do that for small businesses, but I think it is quite important to provide, not highly subsidized, but liquidity-based support for smaller businesses, ideally ones that we think should be solvent in the long run, and not ones that are close to failing anyway, although that’s going to be very difficult to do in a way that isn’t highly discretionary, which is also bad government policy.  

THOM:  Thank you, Professor Parker.  Another followup on this line of thinking here from Dionne at Axios.  Her question is about the fear that the financial crisis is not necessarily that the stock market continues to fall, but that companies begin widely defaulting on debt and go bankrupt, and others go out of business, therefore this would be a nightmare scenario similar to what we worried about in 2008.  Her question, to avoid this, don’t these bailouts make sense? Not just to help stock prices, but to keep companies from going out of business because they cannot operate without revenue for so long. Professor Parker? 

1. PARKER: I think there’s a big distinction between small businesses, where Axion is really heavily involved, and the very large firms where going into bankruptcy does not mean going out of business.  I mean, it’s appropriate for pets.com to do into bankruptcy not get a loan or to go out of business, and it might be appropriate for GM to into bankruptcy in 2009, but to be reorganized and emerge.  That is, I think, the main point of our letter, it’s about those sort of handouts. And if large corporations do default on their stocks and some of their bonds, whatever value they have will accrue to just different set of the bonds, different set of owners of the company.  It’s not that that value is destroyed. We have a pretty efficient bankruptcy system, it could be better, and large corporations go through bankruptcy and emerge actually more efficient than they went in, typically. Now it is true, I want to emphasize one of the questions brought up before, we are losing a lot of output right now, we are losing a lot of GDP, things are shut down.  And that GDP is lost no matter what we do with financing, lending, subsidizing on all this stuff. There will be wealth lost, and there have to be more, and there is no way that we can’t bear them, we have to. The question is who bears them? And a package that takes future taxpayer money and hands it out to the stockholders of the world who own the US stocks doesn’t seem like the best way to handle a significant loss in our resources.  

THOM:  Thank you Professor Parker.  Professor Berk as something he would like to add on this line of thinking, as well.   

1. BERK:  I just think it’s time to call a spade, a spade.  We have to come to the realization that bankruptcy does not mean liquidation.  We have endless examples of large companies operating perfectly fine in bankruptcy.  What’s really going on here is investors through the companies are saying oh, bankruptcy is the same as liquidation, so the only way we can keep these companies operating is to pay us.  

THOM:  Professor Admati, on that question?  

1. ADMATI:  Well, the bankruptcy system is meant to distinguish from liquidation, like Chapter 11, that’s most what I call large corporations go through, has been designed precisely to have ongoing concern the company is operating, which a lot of us have emphasized.  And this is less available, or it works less well for small businesses. We do not want, however, half of the economy to be in these courts, because this is a legal system with investors indeed haggling over for a lengthy amount of time. Indeed, the Lehman Brothers bankruptcy that started the financial crisis is still going on, not entirely done, and a lot of lawyers and a lot of other people made money along the way of more than a decade of a process.  So bankruptcy with financial companies are particularly complicated, which is why we essentially have too big too fail of financial firms. Other firms, we would want to prevent some of these bankruptcies, and I think some of these loans might be able to do that, but again, that has to be very, very done, if you’re going to do that. If you support the employees directly, say through furloughs, then they don’t have an employee expense, there’s not that excuse.  So you can furlough them and then the ones that have a future can survive, not necessarily by going through these courts, then that would be kind of the sweet spot.  

THOM:  For Professor Pfleiderer we had a question from Elaine at Lacroix, what kind of measures do you support in the face of this crisis and are there any measures in this stimulus bill that you think are appropriate? 

1. PFLEIDERER:  I’ll answer that question but I just want to basically give the big picture again on all the questions that have come up before, and that is to simply make the observation that the government is going to be supporting individuals by sending out checks, basically, $500 for a child, and $1200 I believe for individuals.  But it’s capped. It’s not going to go Warren Buffet, it’s not going to go to my next-door neighbor he’s down the street, Mark Zuckerberg, because those people obviously don’t deserve it, they aren’t in need. And the same principle is being articulated by us when we talk about bailing out corporate investors. That is money that could be directed better and needs to be directed better to the most vulnerable.  So, all the needs that we’ve basically identified that are real needs, needs of small businesses and needs of individuals are ones that need to be addressed and we shouldn’t be sending money, as Jonathan Parker has noted, to foreign investors that can well weather this crisis and bought claims to do that. So, I certainly don’t have a laundry list here of allocating that money that should be freed up from going to investors, how it should be spent, but it’s very clear that we have needs in the medical system and we have needs of people in the gig economy who just are going to be suffering here unless they can support their children and support their families.  So, every dollar that’s taken away from supporting investors in United Airlines, and it has been pointed out, United Airlines functioned quite well when it was in bankruptcy, every dollar that’s taken away from that and put into families and into our medical system to make sure that we can meet this crisis is going to serve us much better in the long run and is a much fairer allocation of resources. I realize that that’s not a precise answer to the question, but I’m telling the direction of the flow of money here.  

THOM:  Another question from the chat, Mattias at German Business Week, what about governments becoming a shareholder in the companies that they bail out?  Professor Pfleiderer, any thoughts about that?  

1. PFLEIDERER:  Well, again, if it’s done on terms that don’t advantage the investors that are already there, in other words it’s not a windfall gain to those investors, then that’s potentially something that would be good.  But the point here is that investors who bought claims that were not guaranteed by the government should bear losses, and the taxpayers should not be making an allocation of money to shore up those investors who are, as Jonathan points out, the outside of the car.  They should basically be taking the dents and the bumps to protect the people inside.  

THOM:  Are there examples of this working in the past?  If I recall correctly from the 2008 financial crisis, and particularly with the auto industry, those loans were paid back with interest to the taxpayer.  Is that something you feel is positive and could that sort of setup work in this case?  

1. PFLEIDERER:  Well I know it’s often times said, hey look at what happened in 2008, 2009, the taxpayers to some extent came out, it would appear, okay, because these were paid off and the government made a profit.  Of course, if you take that reasoning to extreme, we should have crises all the time so the government can make money. What’s happening here is if the government does something that benefits creditors in the sense that their claims are worth more, what that means is very simply that the government and the taxpayers, including those Uber drivers, have supported those investors, and that’s not a direction we want to go.  So, everything should be done at fair market prices, and if it’s done at fair market prices and puts the government in above all the other investors, then that’s potentially a good thing. The problem is that at this feeding trough, things aren’t necessarily going to be done at fair market prices. There are lobbyists and there are a lot of others that are going to be trying to grab some of that feed from the trough, and that’s what we need to make sure does not happen.  

THOM:  Professor Admati, would you add anything to that? 

1. ADMATI:  Yes, so in the UK and other countries occasionally they actually took equity position in some of that, Lloyds was taken by the government, et cetera.  That’s an interesting thing for a capitalist economy to do, but in fact when the government came to the banks essentially as a lender where the bailouts are loans, the government actually put strings on those loans in 2008, and the strings involved no dividends and share buybacks, no payouts to the other shareholders.  The government was more senior to them, was preferred investors, it was a debt that doesn’t cause bankruptcy, but it was still debt, and pretty good terms for the government with some other kickers in, and in addition there was some compensation restriction. What that meant was that even though the package was sold to taxpayers as this will improve lending, there’s evidence that the banks that got the TARP money didn’t always improve lending, they just wanted to pay back so they can go back to paying their executives and employees just as before.  And so that roundtrip just does nothing for the economy and as I said before, it allowed the recession and the housing crisis to linger that much longer. So, if you take equity position, at least you’re not introducing those conflicts of interest to the decision makers within the corporations because you’re taking over decision making, and that can have some advantage. Even there were some at the time saying we should actually own the banks. So, I am open to that idea if you can structure a truly independent unconflicted set of people in control.  

THOM:  Professor Berk?  

1. BERK:  I just want to say very, very categorically that I am 100% opposed to government having an equity stake in any company.  The one reason is obvious, the government has no ability to run a company. If this government can’t even get tests for a virus in place, the idea that they would know how to run a company is completely ludicrous.  But the second reason is a more subtle reason, that’s the reason that Paul has emphasized, which is if nobody else wants to take an equity stake in the company that is telling you it is not a good idea to take an equity stake in the company.  The price is too high. The only person wishes to buy the equity, all the debt, is the government. It’s because the government is overpaying for it. When the government overpays for it, it means taxpayers are paying for it. So, those are the two reasons why it is a really bad idea for the government to become an investor.  

THOM:  We have another question from the chat, from Manuela at Business Because.  Are there any examples of international governments’ approaches toward handling the coronavirus impact on their economies that you think could be feasible as an alternative here in the US?  Professor Admati, would you like the answer that? 

1. ADMATI:  Yes, first of all, to go back to Jonathan Parker’s point and might mention it briefly at the end.  We have a healthcare crisis this time, it’s not a pure financial crisis. The rest of the harm from the economy is collateral to the coronavirus.  Fighting the coronavirus will also help the economy. So, I think countries that have invested heavily in testing and in healthcare, and in their medical professionals, because there is also an ethical life/death question, are we going to sacrifice half a million lives for a stock market boom or something?  We need to focus on individuals, healthcare system, paid sick leave, tests, ventilators, masks, et cetera, and some countries are doing that. I think Germany is doing better, et cetera.   

THOM:  Professor Parker, would you like to add anything to that?  

1. PARKER: South Korea is the great example, I think, of doing a great job of testing and isolation, and instead of having to shut the entire economy down, they’re just shutting down the people who they find who are sick and isolating them, and that’s just a much more efficient way to deal with the health problems, and that naturally leads to a much better economic performance.   

THOM:  Another question for you, Professor Parker, about giving loans to firms and small businesses, if they’re unable to pay back those loans either short term or long term, what’s the impact there and is there any justification for something more like a grant program? I saw some comment by Senator Lindsey Graham suggesting that some of these small business loans could in fact be forgiven.  

1. PARKER: That becomes extremely costly for the taxpayer.  So if we roll back and think about what happened in the financial crisis where an entire sector, banks are to some extent special because they’re in the business of transferring resources between today and tomorrow and their entire business line is about promises about the future.  So if a bank isn’t going to be solvent or there are concerns about being solvent, it can just disappear. And so it can’t be going through bankruptcy and be reorganized, and Lehman Brothers is the great example of that. The whole sector was at risk of disappearing because the whole sector was under this concern that it might not be there next week or next month, or in a few months.  And so there was a question of an entire sector being eliminated. There’s no such thing in the large firm world today. But even in that situation, when we invested in the banks, the so called bailout, we gave them a bunch of loans, and one of the stipulations for much of the lending was that the bank was supposed to solvent without getting the loan. And the rates that we gave the loans at were as Paul noted, and Anat has criticized a lot, not at fair market value, if they were at fair market value the market would do it.  They were subsidized. And in addition to the loans, they were subsidized, but they came with 5% interest rates at a time when interest rates were essentially zero, so they weren’t that easy, and they came with claims on the profits of the bank in the future, typically claims were warrants, which means they’re options on the value of the bank going up in the future, so the taxpayer could be recovered. That said, despite all of these safeguards, a bunch of these banks didn’t repay. On net, the whole program as a whole made a little bit of money, but there were banks that weren’t able to repay and went under.  The idea that we just hand money to businesses, rather to people, is a little bit strange, however. I don’t think I would go as far as to say we’re giving out loans here that we’re planning to not recover. That’s a very serious slippage away from capitalism and away from any sort of market based system and towards the government essentially owning the means of production and backstopping unprofitable businesses. And if there is a way to be unproductive going forward, it’s to subsidize the least productive of our firms. And so I would be extremely wary of doing that, not just from the question of who is the government handing out money to, and to what firms, which is the essence of corruption in a lot of countries, but also just on terms of aggregate productivity.  We want the economy to go through a V-shaped dip here. We want to shut it down and reboot it, and to reboot it, we need everybody to be back in the same system and playing the same game they were before, trying to make money by giving good products to American citizens, not try to make money by going and getting money from the government.  

THOM:  Professor Berk, what would you add to that?  

1. BERK:  I really want to take a step back here and think about what we say when we say we want to help small businesses.  This is like saying, oh, we like apple pie. A lot of small businesses are owned by wealthy people who could easily weather the storm.  The idea that we’re going to start giving them money is to me fundamentally unfair. Now, it is true that small businesses do not weather bankruptcy the way large corporations do, and the focus of our letter is entirely on large corporations and is not on small businesses.  But we should not use that as an excuse to all of a sudden just hand money to rich people. I agree that one of the biggest concerns I have is that the small businesses are in no capacity to contractor to pay their employees. And so a simple thing to do is to make sure that those furloughed employees have checks in their pockets.  But the next step which is they’re all going to go bankrupt so we have to hand them checks, I do not subscribe to. If you think about the situation, it is not obvious to me that these businesses really are facing bankruptcy. Just think about some of the issues involved. I hear people say, well, how will they make their lease payments?  Trust me, a landlord in this situation, the last thing a landlord would like is to lose his tenants, because he’s not getting any new tenants, so he’s going to be in a very amenable position to work something out with that small business owner. The banks are in the same position. If the banks could get the small businesses through so they continue to make money, that’s the obvious thing for the banks to do.  So rather than hand out money to small businesses we could think about more in inventive things like say, okay, small business loans accrue interest, they don’t have to make the interest payments, and perhaps the government has some role there to provide an incentive for banks to allow small businesses to accrue interest on the loans rather than make the loans themselves. That has the benefit that a business that is really not in good shape and should go out of business, would still go out of business, and the businesses that should not go out of business, that we need for the economy, would remain in the economy.  I guess the fundamental takeaway here is it makes sense to think very carefully about how to help of small business, we’re all in favor of that, but it’s very important to think about helping small businesses in a way that is productive and useful.  

THOM:  Professor Admati and then Professor Parker.  

1. ADMATI:  Just very quickly to add to that, I looked closely at a very good friend of mine here who has a small business, the business is an audiology business.  So, she has employees, about 15, renting two offices in the Bay Area, very expensive, a big stock of hearing aids, et cetera. So I was going through with her, she’s on the phone trying to negotiate with her suppliers, furloughed the workers, they’re getting 80% of their pay, but capped in a low cap, so maybe that should be more generous, so it’s 80% of whatever pay, because the pay depends on where you live in the Bay Area, $450 a week for many months might not suffice, so you might want to look at the unemployment insurance and that takes care of the employees who are furloughed because they cannot work right now.  Now, when she comes back to business the people will still need hearing aids and there is a need with the baby booms and all to form an audiology business that is healthy except for this disruption. So the disruption, yes, she is negotiating with her landlords and you’re right, they are extending and they are forgiving some and all of that. So there will be some losses spread around and the hope is that the small businesses maybe with some help which are persistently healthy businesses, will not have to shut down.   

THOM:  Professor Parker?  

1. PARKER: I just wanted to give sort of an amendment to this which is that it’s probably worth, given that it’s going to be difficult to figure out which small business to lend to and given that we want to lend and not give money, but we want to support through bankruptcy, and given that a lot of small businesses and especially medium sized businesses are actually privately owned very rich corporations, what we would like to do perhaps is have any of the loans cosigned by ownership, and I don’t mean the shell corporations or the shell corporations owning the shell corporations, but actually the people at the top of the list.  And with them being on the line for the loan, those who are well off will actually repay the taxpayer and that would be rather important in this situation. So we’re not just handing out money to the wealthy people who own their own firms.  

THOM:  Professor Pfleiderer, your thoughts on that.  

1. PFLEIDERER:  I just want to make one additional point which is a very simple one, but I think a very important one.  When we start handing out money in subsidies and supporting even small businesses, the problem is that those that are wealthier, those that are more savvy are going to be the ones that get to the trough first, and it’s not necessarily going to be allocated to those truly in need.  That’s a real problem here. Jonathan just came up with good idea, cosigning, things of that sort. But it’s really hard to get this right. I was going to express this perhaps at the end, but one of the great legacies of 2008 and 2009 was we were left with a lot of people thinking that the system was rigged, and we saw the Tea Party, we saw Occupy Wall Street, there is a general feeling by much of our population that our system is rigged in favor of those best positioned, those wealthy, the 1%.  We want to do nothing here, if we can avoid it, to recreate that feeling or to reinforce it. So I think all these proposals that we might have to support small businesses are intentioned, the probably is getting the money to where it’s really needed and sending money directly to furloughed employees and to individuals who are truly in need is a much better way of doing it than trying to get it through other channels where wealthy people and others who don’t need it are going to start siphoning it off.  So it’s a general point, but I think it’s one that is motivating all of us in what we’ve written.   

THOM:  Professor Admati with regard to the comparisons to TARP and these loans to small businesses, loan forgiveness, and those kinds of questions, how does this relate to the experience of TARP in 2008, 2009 and the oversight there? 

1. ADMATI:  I was recently in contact with Neill Barofsky who was the Inspector General of TARP, and he wrote a book called Bailout, which we might want to go back and read about the nitty gritty details of what Paul Pfleiderer was talking about in terms of the actual details.  I also know from people even within the Fed system, about the way the bailout of AIG went, I wanted to remind me, we bailed out an insurance company at the time, in addition, and the terms of those loans and the structures that were created to make those loans, all of that does need oversight and I do think that the overall sense that there is this enormous, and I mean it really is unbelievably large, trough of loans and other things that have to be priced, that have to be handled, that have to be gotten to where we need them to get, and then somehow trickle down to what we need, is a hugely dangerous thing.  So the oversight is really important, the governance is really important. Also I would add that many small banks did fail during the financial crisis. The FDIC has a very good process for taking over failed banks, and hundreds of small banks failed without any problem. So, when you have a good process in place to decide who is insolvent, then you should do that.  

THOM:  Professor Berk, you have something to add? 

1. BERK:  I just want to go back to what Jonathan Parker said, because I think it’s an example of a much bigger point.  The idea of forcing business owners to sign the loan so they’re personally responsible is an excellent idea. It is an example of a much bigger idea which is if you’re going to do this you need to get the incentives right.  When you do something you have to make sure that people are incentivized to act in the way you want them to act. For example, right now we’re paying 80% for furloughed salaries. One of my friends who owns a small business and has about 50 employees, first reaction to that was this is great, now my employees won’t want to come into work, they can sit at home and earn a salary, and they don’t have to come into work.  We have to think carefully about incentives. And if don’t think about incentives, the problems mount.  

THOM:  Thank you, Professor Berk.  We have a question from the chat about the long-term effect of the bailout on programs like Social Security, I assume other kinds of social safety net programs that we have.  Which of you would like to answer that? Professor Parker? 

1. PARKER: I guess I’ll just say that the concern here is that the combined federal debt and the implicit promises to the future, both to bond holders and to future retirees, and to the future healthcare that we’re promising retirees, are going to put an enormous strain on the federal budget going forward.  And a $2 trillion dollar package is an entire year of income tax revenue. We are already nearly at a full GDP’s worth of federal debt, and we were going to run a trillion dollar deficit in this fiscal year before the coronavirus hit the economy. A trillion dollar deficit is $7000 per person, it’s half a year’s worth of federal individual income tax revenue.  So, we’re in a pretty brutal fiscal situation. The response on the other side is well, look, low interest rates. So we have very low interest rates so we can borrow very cheaply. So, I have two comments on that. One, to the extent that we have to borrow, it is essential that we borrow long-term debt, because otherwise we become like a bank where we can have a run on the United States.  And secondly, I would be very concerned that we have low interest rates because people think the future is very risky and dangerous and we’re unhappy and unsafe, and we don’t like there will be a lot of resources in the future, so we’re trying to save a lot today, because we’re trying to protect our future. If the government turns around and bets that future still further, that’s going in the wrong direction.  Let me be very clear. We do need some social insurance to out in this crisis to the worst hit households, I’m fully supportive of that. However, it is not the case that we just have money lying around that we can spend willy nilly. We have to be very careful with the resources of the American taxpayer and I think hopefully as this bill gets hammered out and work goes forward, it will be that way, handing out loans and a lot of money to big corporations does not seem like it’s doing that.  That’s our bottom line.  

THOM:  Thank you, Professor Parker.  Platform Admati? 

1. ADMATI:  I want to add, I am in favor of the social safety, the safety net programs that were started after the Great Depression and they’re still here today, but safety nets have eroded dramatically.  So I think that is appropriate to give safety nets to individuals, however, I think that we have a problem in terms of giving money to the corporations, we’re still on the social security question.  Well, we’re going to have to shore up that system and be extra careful, just to say one thing to Jonathan Berk’s comment about incentives, I don’t think that many employees of small companies are eager to stay and not work for 80% of their pay.  It’s not all about financial incentives, I think people do want to go back to work and do want to go back to consuming, and we should just act to make that as fast as possible, safely. So again, focus on the virus.  

THOM:  Professor Pfleiderer? 

THOM:  I just want to add on the Social Security, obviously that’s a concern, the long-term viability of our economy and our government is a concern, and that means that we need to address this virus threat which has been labeled as fighting a war, and make sure that the resources get to fighting that, and make sure that the long-term health of the economy is preserved.  And just back to the issue that is basically at the forefront, bailing out investors, especially when some of that money goes to foreign investors and to wealthy individuals, is not moving the needle in that direction, it’s moving it in the wrong direction. So yes, these concerns about social security, the long-term health of our economy are very salient now, and that’s why we need to allocate the scarce resources that we have now, we’re talking about money from taxpayers, ultimately government debt is going to be built up, we need to allocate that in the most efficient way.  And this bill does some things right, but some of it is being misdirected, and that of course is just getting back to the main message here.  

THOM:  Professor Pfleiderer, kind of a followup about that, we’re about to see next week, I assume, the unemployment for March, a lot of these social safety nets get so much of their funding from payroll taxes, if wage earners are being laid off and all those payroll taxes decline, what kind of timeframe or how do we analyze what the impact will be on unemployment insurance and the other payroll taxes that are taken out, if unemployment which has been so historically low suddenly takes a spike? 

1. PFLEIDERER:  That’s a good question, and I wish I had a crystal ball, we all do, to see how long this is going to last.  It seems to me, and I think to most medical experts, that putting people back and not doing social distancing is just going to make the problem much worse in July and September, and so we need to take the actions to meet this health crisis, just as we had to do in World War II.  The good thing is we look back on World War II and we came out of that, we’re not speaking German, and I think we’re going to come out of this, but we have to allocate the resources in the right way. The hope is that we’re back to something like normal in a shorter time rather than a longer time, but being myopic and pretending that this problem is short lived is certainly not what all the experts are telling us on the medical side.  So yes, we’re going to rack up a big bill and unemployment and things, but we have to support those people, otherwise we’re facing really dire collapse of the economy if a huge number of people are unable to feed their families and aren’t ultimately in a position to contribute to the economy once things get going on again.  

THOM:  One more followup for Dr. Pfleiderer and then I want to go to Professor Admati.  We’ve heard comments in the past, in 2008 especially, about the possibility of a double dip recession.  What if we’re looking at a double dip pandemic? With a lot of talk of reopening the country for business in just a matter of a few weeks, and that may be premature, according to a lot of health aspects, if we’re looking at trying to get things started again and then we have another spike in cases of this disease and need further isolation, quarantine, advisories, et cetera, in June or July, and we need to do another whole shutdown, what would you predict the impact on the economy with that? Is it better for us to try to restart and then have to put things on pause again, or is it better to stay in this situation as kind of a shutdown, and wait until the coast is really clear? 

1. PFLEIDERER:  Well, again, I’m not a medical expert, you know, Jonathan Parker observed that South Korea and some other countries that are taking more prudent actions, getting testing out there, and meeting this crisis head on, are doing better.  Our government has failed us by not having test kits available, by not taking this seriously. And the threat of a double dip epidemic is partly, and I would lay the blame on this administration and many of the state governments as well, not taking this seriously in a timely way and we now need to be serious and I would worry about that, that we would end up basically thinking things are okay, so let’s open the economy and get things flowing, but again, I’m not a medical expert, but I think we need to be prudent because the downside is really scary.  

THOM:  I feel like all the experts want to follow up with this, so, Professor Admati, Professor Berk, and then Professor Parker.  

1. ADMATI:  What we’re seeing and part of what we’re witnessing is the fragility of the economy.  So when things are fragile they can seem like they’re going fine for a while, and then the crisis or shock exposes the fragility.  We are seeing enormous fragility of our corporations that loaded up on cheap debt with low interest rates that one of the people who really warned about excessive borrowing before the 2008 crisis and there were many in 2005 that nobody wanted to listen to, was morally problematic.  Keeping the interest rates low and making everybody chase the yields and take enormous risks, and more and more with tax subsidies, I want to remind you, we never seem to learn from that and make our economy a little more stable and less fragile. Now, I completely agree with the sentiment that’s been expressed, and I want to say it ever stronger.  The notion of ignoring on the healthcare problem are dire for everybody, both our lives and our economy. It would be incredibly dangerous to ignore that and we’ve already ignored it and minimized the problem at our peril and people are paying the price for all this denial and all these promises and all this nonsense that instead of the politicians controlling the messages with propaganda, we need the experts to hold politicians accountable and they should be the ones telling the public what to pressure for, and it’s not going back to work for the economy no matter the consequences in the short run.  So, that is the most dangerous and scary thing that I’m hearing as we were writing the letter and preparing for today.  

THOM:  Professor Berk? 

1. BERK:  First I want to observe that what we’re not talking about now is not the letter and I do not think all the signatures of the letter would agree on many of these issues.  So, please understand we’re all talking for ourselves at this point, we are not talking about the writings of the letter. With that said, I have a big picture observation.  For too long this country has operated in this view that we can do anything. We can pay for everybody’s healthcare, we could have 12 aircraft carriers, we can do anything we want.  The government just keeps spending money, we’re running deficits that are not sustainable. Eventually if we want this country to be viable in the long term, somebody has to turn around and say enough is enough.  There’s something called having to tighten your belts, the time has come. The country cannot continue to spend the kind of money we’re spending to give everybody everything they want, and the time has some to realize, and this crisis I think is making it clear to everybody, the time has come, we need to start making difficult decisions, and in particular we need [inaudible]  for that. The idea that we’re sitting in a country and we can’t tell who is sick and who is not sick, we simply just do not even have that basic piece of information, speaks to the lack of leadership in this country.  

THOM:  Thank you, Professor Parker, you had something to add that as well?  

1. PARKER: I just want to make the simple point that if we are in a double dip because of the coronavirus, health issues not being well dealt with, that a $2 trillion dollar spending package in this dip will not leave us with money options in the next dip.  This is an awful lot of response without knowing exactly what the problem is yet.  

THOM:  Thank you sir and to the point.  We have one final question that was submitted by one of the reporters who wanted to attend, but had a conflict.  It’s Sarah Max from Barron’s. If any other media participating have any chats, please get them in now and we’ll to see if we have time to do that.  The question from Sarah Max at Barron’s, she’s doing a story about the various debt, tax and home relief efforts by states and local government as well as creditors.  Professor Berk you refer to people working out something with their landlord because the landlord doesn’t want to have to find a new tenant in this economy. Does this stimulus package do enough to support those kinds of things, suspending evictions, suspending utility shutoffs, collecting mortgages, all those kinds of things.  All of the experts could respond to this. Professor Parker.  

1. PARKER: I’ll just take a quick first big picture answer and then hopefully some of my colleagues can fill in some of the details.  We’re suffering a huge output loss. There’s going to be a lot of lost goods and lost wealth and lost money because of this.  We are shutting down the economy in a large part of the sector for maybe a month, maybe longer. Handing out money is only about who gets the smaller amount of resources we have.  So the government can’t step in and make everything alright here by somehow borrowing money from ourselves in the future. There are two purposes to a bill such as this. One, economic stimulus, and two, social insurance to help the hardest hit.  And right now is not the time for much economic stimulus. We don’t want people going out to restaurants and going out to sports games and flying, and doing all these things right now. We’re not trying to send out money to companies and firms to stimulate demand, which is the usual purpose of a stimulus bill called a stimulus bill.  This should not be thought of as a stimulus bill, this should be thought of as social insurance in a disaster state of the world for the most hard hit. And the idea is to freeze time for a month or six weeks, and let people in six weeks emerge with not a huge amount of debt, not starving, not being evicted, and instead have a V-shaped recovery where people find themselves roughly where they were when we went in, obviously they can’t do that completely, that’s hopeless, but to some extent we can restart the economy rather quickly and get moving again.  All of that workout stuff that the question is about, the mortgage, the rent, and all this is steps toward that that private individuals can take. I can’t pay my mortgage right now, can the bank please move more mortgage payments to the end of my mortgage instead. It’s in the bank’s interest to do that, it’s in my interest to that. That should get done. Is there a way the government can facilitate that? Maybe on the margins the government can help a little bit, but the government can’t come in and command that, and shouldn’t, and the government can maybe give a little bit of resources for the bank to help process that.  But that’s not a first order issue here in the sense that it’s probably in the interest of the bank not to go through a huge long foreclosure process over two months of rent. So, if the government can get the rest of this right, and it’s just two months of mortgage payment, then we’re in fine shape. If the government can’t get the rest of this right, then those issues are something I don’t think the government is even going to able to manage.  

THOM:  Thank you.  Professor Admati?  

1. ADMATI:  People mention state and local, and I want to mention here that the distinction between local government and federal government.  Because our federal government has failed us. Our federal government has allowed the states to compete for masks, things like that.  Local governments in some places were much faster to recognize and listen to the experts than the federal government was. And so right now we are talking about a bill before the federal government.  To the extent it allocates to the states, I have more trust in the states and the local governments, at least the ones I follow closely, such as my own to thoughtfully think about what needs to happen with those funds.  It seems like Washington can’t get its story straight, and politics in Washington is very difficult. That is really too bad for this country and some states really haven’t been brought in line with the situation. So, I agree, there is going to be pain and the pain just has to be minimized for the people who we want to have safety net for.  And the people who can afford to take a hit, should take a hit.  

THOM:  Professor Pfleiderer? 

1. PFLEIDERER:  I just thought Jonathan Parker made an excellent point.  We’re not in a stimulus situation where we’re trying to provide a safety net.  I’m maybe going to go a little bit outside of my expertise, but I understand stress has basically very bad effects on your immune system and there are people at the most vulnerable parts of our economy that are stressed, they’re sheltering in place, this is creating a stress  on families and we have an opportunity here to meet this crisis in part by taking away some of the financial stress that people are facing which potentially boosts their immune systems, and potentially puts them in a much better situation when our economy gets going. And that’s what the emphasis should be.  I thought Jonathan Parker said very well, and I think that fact should not be lost here.  

THOM:  Thank you, Professor.  Professor Berk? 

1. BERK:  You know, it’s hard to follow Jonathan, I think he summed it up absolutely perfectly.  Let me just say this. In normal recessions we have no idea what caused the recession. Everybody has their own theory.  And therefore it’s really hard to know how to fix it. In this case we all know exactly what caused the recession. So the fixes that worked for other recessions, the assumption that it worked in the previous recession, it will work here, it just doesn’t make any sense.  We know exactly what caused the recession, we know exactly who is suffering, and we should help them. I can’t emphasize enough, Jonathan’s point that we do not want to stimulate is the essence of this. The last thing we want to do right now is stimulate.  

THOM:  Thank you, Professor Berk, and well noted.  I will refer to this as the relief package henceforth.  Thank you everybody for joining. We will wrap up at this point.  We have a link to the open letter in the chat, please take note of that from Helen at Stanford, and she notes in the chat that there are now law academics also signing on to this.  That seems great to open it up to interdisciplinary parts of the community. Any media who have any further questions, we are going to be happy to share with everyone who registered contact information so that you can arrange further followup with these experts, and we also are going to have a video recording available of this that we will make sure to share, as well.  With that, I will thank our experts, Professor Pfleiderer, Professor Parker, Professor Admati, and Professor Berk. Thank you very much for spending your time with us today to talk about this very important relief package, and everybody please stay safe and healthy out there. Thank you very much.