One Fed President’s Call For National Lockdown Is Too Little, Too Late

A leading Fed official called for a national lockdown. Like most Fed proposals, it will do more harm than good.
Minneapolis Fed President Neel Kashkari
Minneapolis Fed President Neel Kashkari wants an iron-clad shutdown of the U.S. economy. His approach to containing the virus is months too late. | Image: REUTERS/Brendan McDermid/File Photo
  • Minneapolis Fed President Neel Kashkari suggested a four-to-six-week national lockdown.
  • The idea could have been a sound one back in March.
  • His suggestion shows that policymakers continue to take the wrong approach to the pandemic.

Neel Kashkari, President of the Minneapolis Fed, recently suggested a four-to-six-week national shutdown. That makes him the highest-ranked government official to come out so strongly in favor of shutting down the economy, at least for now.

Shut Down Now to Save the Economy? That’s Not How This Works

Speaking on Face the Nation, the Fed President stated, “If we don’t do that and we just have this raging virus spreading throughout the country with flare-ups and local lockdowns for the next year or two, which is entirely possible, we’re going to see many, many more business bankruptcies.”

Kashkari’s remarks come after the United States reported a 32.9% annual drop in gross domestic product in the second quarter, the highest on record.

US GDP
GDP declined at a 32.9% annualized basis or 9% in the second quarter. Either way, the drop is a magnitude larger than the financial crisis. | Source: Wolfstreet.com

The idea of a total shutdown to stop a pandemic sounds simple and effective. At least, it would have been at an earlier stage in the outbreak, say back in February or March.

That’s not the approach that the United States took. As a nation that tends to be wary of governmental authority, it took local shutdowns by school boards, private companies, and non-profit organizations before the general population got the message and started working from home. The people didn’t get their cue from the federal government.

While pandemic numbers continue to rise, the mortality rate has dropped. Two things have become clear. First, Covid-19 is no Spanish Flu. Second, the cost of the economic shutdown, with the rise in unemployment and likely suicides that will result, has been at least as bad as the virus itself, if not worse.

History Suggests a Radically Different Course of Action From the Fed

Looking at past pandemics, they’ve been brought under control by quarantining the sick and those exposed to being sick. The current approach of treating everyone as a potential threat and locking down the entire economy has no historical precedent.

For the Federal Reserve to suggest a steeper lockdown now shows why the Federal Reserve catches so much criticism.

By cutting interest rates to zero and throwing money at the corporate bond market, the central bank has already allowed the wealthy to refinance at record low rates. It has also protected the value of bonds, and indirectly, stocks.

Fed Rates
The Fed slashed interest rates back to zero, allowing the wealthy to refinance their debt at record-low rates. | Source: Tradingeconomics.com

The net effect of that policy–at a time when millions of lower-wage Americans have lost their job–has been to radically increase income inequality.

As long as the Fed is focused on backward suggestions that increase inequality rather than focus on the best course of action for all Americans, it will continue to create and fuel asset bubbles to the delight of asset owners.

As Kashkari himself pointed out in his interview, “Those of us who are fortunate enough to still have our jobs, we’re saving a lot more money because we’re not going to restaurants or movie theaters or vacations.” Even the Fed knows they’re doing it wrong.

 

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author holds no investment position in the above-mentioned securities.

Sam Bourgi edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

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