Economic Hope on the Brink of Disaster

The Dangers We Face:

Economic hope is the thought for the day. Since the world fell under the grip of COVID-19, central banks began to drop interest rates to stimulate the world economy. In the United states our Federal Reserve took action quickly. Real estate buyers, not yet gripped by the fear we see today, reacted by rushing to buy homes. Simultaneously, sellers reacted to rising demand and low inventory levels by staying the course or raising prices.

However, these reactions were short lived. As the scope of the pandemic became apparent, buyers and sellers began to react differently. Fear replaced dropping interest rates as the motivating factor. Today, buyers are more likely to shelter in place than go house hunting. Similarly, sellers prefer not to have strangers visit their homes and potentially expose them to the virus. Those who can afford their homes prefer the security they offer and defer plans to sell. But those who are suffering economically are lowering prices in reaction to dwindling demand. The market is in turmoil.

Fear Cannot be Allowed to Supplant Economic Hope:

Clearly, the pandemic’s impact is felt throughout our society and our economy. Unemployment claims are climbing to levels exceeding those experienced during the Great Depression. Many business owners have closed their doors permanently. I practiced as a CPA for many years and have friends who fear that their practices will not recover from the economic impact of the Coronavirus outbreak. They tell me anecdotally that they expect as many as 80% of their small business clients not to reopen. But there is economic hope.

The latest projections from the medical community are more encouraging. While it is too early to reach definitive conclusions, there are strong signs that sheltering in place and social distancing are working. But models are also predicting that if we move away from these activities in early May, the expected death toll in our country will climb back to near the levels of the dire predictions of several weeks ago. So lets stay the course and defeat this pandemic.

The Forces Primed to Save Us:

Additionally, there are forces at work which may yet change the trajectory of the economic aspects of this disaster and put us on the road to building a bright future.

Despite the dysfunction apparent in Washington, our legislators have managed to pass three pieces of bipartisan legislation and there are signs of more to come. Amazingly, these congressional actions are funneling an unprecedented amount of stimulus into our economy and engendering economic hope. These actions bring with them risks of inflation, but predictions of rampant inflation as a result of the 2008 stimulus never materialized. Lets hope that portends what will happen this time.

The centerpiece of these recovery acts is the third piece of legislation, the so called two trillion dollar economic support plan. But is the two trillion dollar figure accurate? The answer is a resounding “no”! While much of the cash this package infuses into our economy is intended put dollars in the hands of consumers and help small businesses to weather the next sixty days, an additional $445 billion is being funneled to the Federal Reserve. Of course, actions taken by the Fed have been instrumental to our survival through many economic upheavals. The most recent example was the crash of 2008. However, the Fed took actions during that crisis that have left it with limited resources now. It was in need of new funding to be able to mitigate the economic disaster we face today.

Congress Provides Economic Hope:

Realizing the danger, our legislators implemented a bipartisan strategy to restore the arrows to the Federal Reserve’s quiver. Most importantly, you must understand that the Fed is a bank, a central bank, but none the less a bank. In order to maintain stability, banks keep in reserve an amount equal to ten percent of the funds they lend to customers. Of course, with lending comes the risk that some loans will not be repaid. This ten percent cushion serves to protect a bank and prevent the panic we saw during the Great Depression.

Therefore, the cash infusion Congress provided to the Fed allows our central bank to channel an additional four trillion dollars into our economy. So the stimulus package in fact provides six trillion dollars to our economy, not two trillion. Importantly, professional economists will control the Fed’s response. These economists have demonstrated uncanny skill to mitigate damage to our economy. Further, they will execute their defensive strategies apart from the partisan bickering in Washington.

The Bottom Line:

We are in for some hard times. Our economy is sustaining a devastating blow. Of course, what effects the economy has repercussions for all of its parts, including the real estate market. Even Ben Bernanke, the architect of our last recovery, acknowledges that recovering will be difficult. But there is reason for economic hope. Congress has laid the foundation for rebuilding.

You are sheltering in place and practicing social distancing. If you are not in an essential industry, we salute you for doing your part. If you are in an essential industry, we salute you for putting your life on the line every day to help others. We can only do so much, so take comfort in the knowledge that there is synergy in numbers. If each of us does our part, we will defeat this scourge. Of course, we must also find a way to exit this pandemic and survive. Therefore think, strategize and plan. Chart a course to survive long enough to let the Federal Reserve and other government agencies restore our economy. But don’t overlook the importance of staying emotionally strong for your family. Stay positive and have faith.

Think positive thoughts. This too shall pass. – Andy K.


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