March 24, 2020 Reading Time: 3 minutes

“Sadly, 12 years of stress tests and economic crisis planning never considered the possibility of a pandemic. Let us get a better economic plan in place for the next one.” This thought, stated by John Cochrane in the last sentence of an otherwise unexceptional op-ed, no doubt is a thought that has occurred to many others.

The problem with this comment is its failure to be the least bit realistic. It ignores a basic fact: whatever plans regulators have in place for a financial crisis or for a pandemic causing financial distress or some other event causing financial distress–any plan, that is–will be wrong in important ways.

The current problems in the United States are in no small part due to the CDC and the FDA relying on their own expertise when they are as imperfect as the rest of us. In addition, they did not appreciate the importance of easily accessible, fast tests for the virus. The problems of giving the CDC a monopoly on testing are well documented.

The importance of easily accessible tests for the virus is evident even to politicians who are financing tests that are free to the recipient. Anyone with a relative who might have been exposed and cannot get a test is aware of two things. The person is distressed, not knowing if they have the coronavirus. In addition, if they are considerate, they are self-quarantined when there may be no reason at all to isolate themselves at home. 

Similarly, people are less likely to go to restaurants, stores and other public places when other people may have the virus and are not sure of it. While not a cure-all, tests are important. (A vaccine would be even better but that takes more time.)

While “social distancing” would occur even with tests, the absence of tests heightens people’s reasonable concerns about traveling, eating out or working close to other people. While not the only problem due to the coronavirus – cruise ships would have problems even with tests, for example – it is a non-trivial part of the problem.

Governors have ordered all restaurants and bars to close in some states. California is “locked down” and New York is more or less locked down. When restaurants and bars will be allowed to open is unclear to say the least. It is also not clear when people will be allowed to go about their daily business even if that business is not deemed essential. No criteria for reopening or letting people leave their homes have been provided.

Most of these important elements of the present difficulties due to the coronavirus were unpredictable and are having important effects. The extent to which these particular industries are affected are due to details of the recent developments. While some may think that the CDC and the FDA should have predicted their problems – and maybe they should have seen them coming – the overall course of events to where the U.S. is today was largely unpredictable.

To be useful, any plans formulated to deal even with pandemics in general would have to be a detailed state-contingent plan, some of which would have forecasted the failure by the CDC and the FDA, the resulting difficulties and the government restrictions on people’s movements and business’s operations. It is more than a little improbable that the Federal Reserve would have included many of these developments as a possibility and made sure that banks and other systemic institutions could weather these particular difficulties.

A better approach is one that is being followed but not used enough, namely to make banks and the financial system more resilient to all sorts of difficulties. Much higher capital requirements for banks would be a good first step. To the extent that low real interest rates on financial assets such as bank accounts and bonds are due to monetary policy, a higher policy rate and consequently higher real interest rates in normal times would lessen dependence on debt relative to equity.

Designating some institutions systemic and effectively Too Big to Fail encourages higher leverage and riskier portfolios. While claims have been made that systemic institutions will not be bailed out, it is inconceivable that, in the current difficulties, the Federal Reserve would let a large bank fail due to loan or credit card losses, or anything else for that matter.

So, yes, macroprudential regulation should be rethought after the current difficulties subside. Making up plans and having stress tests for very unlikely events should be left out of it.

Gerald P. Dwyer


Gerald P. Dwyer is a Professor and BB&T Scholar at Clemson University. From 1997 to 2012, he served as Director of the Center for Financial Innovation and Stability and Vice President at the Federal Reserve Bank of Atlanta. Dwyer’s research has appeared in leading economics and finance journals, as well as publications by the Federal Reserve Banks of Atlanta and St. Louis. He serves on the editorial boards of the Journal of Financial Stability, Economic Inquiry, and Finance Research Letters. He is a past President and member of the Executive Committee of the Association of Private Enterprise Education. He is also a founding member of the Society for Nonlinear Dynamics and Econometrics, an organization for which he served as President and Treasurer.

Dwyer earned his Ph.D. in Economics at the University of Chicago, his M.A. in Economics at the University of Tennessee, and his B.B.A. in Business, Government, and Society at the University of Washington.

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