“These programs aren’t holding back the economy, they’re actually supporting it”: RSM Chief Economist

Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell testify before the Senate Banking Committee on CARES Act progress. RSM Chief Economist Joe Brusuelas joins Yahoo Finance’s On The Move to weigh in.

Video Transcript

JULIE HYMAN: Joe, I want to bring you into this, because it seems like a lot of the questioning today is not so much about the size or impetus for the stimulus. It's more the execution of the stimulus-- whether it is, as Brian was talking about, the execution of the Main Street Lending or the beginning of the Main Street Lending Plan or the complexity involved with the PPP. From an economist's perspective, what do you think of the programs thus far? And are there any big flaws that are big enough that they're really holding the economy back here?

JOE BRUSUELAS: OK. Well, I think that the execution of the programs have been terrific thus far. It's been a little bit frustrating that the Mainstream Lending Program hasn't gotten up and running. But what's important here is the Fed is creating a market for firms that don't have access to floating debt-- to firms that typically would pay north of 15% interest when they borrow. These are firms who go to the shadow market. We're bringing it out of the shadows, and the Fed is going to create a market for mid-sized firms.

So these things are not easy. And Powell gave a really good explanation of the difficulties that they face. You know, these programs aren't holding back the economy, they're actually supporting it. They're plugging holes in balance sheets, right? Now, I mean, we're going to need a lot more.

And second, whenever you watch this sort of oversight testimony, there's a certain CYA quality coming from the legislators, because it's not on the Fed to save the economy. It's on the Congress right now. And I think that's sort of one of the main takeaways here is that you can tell the tensions are beginning to build as we head towards the election. And the Congress is just going to have to do more. And you know, there's not much more we can say about that--

ADAM SHAPIRO: Joe--

JOE BRUSUELAS: Until the public-- yeah.

ADAM SHAPIRO: It's Adam, and it's good to hear you. I'm glad you brought up Congress and your take on this, because we saw a testy exchange between Elizabeth Warren and Secretary Mnuchin from the Treasury. But earlier, we had heard from I forget which Republican senator it was, but the need to just watch what's been done with almost $3 trillion in spending, which includes the CARES Act, before more gets done. Do you think that Congress can really wait to see how this is all playing out before it can do more?

JOE BRUSUELAS: No, the Congress should not wait. That's a convenient excuse for doing nothing. The economy needs direct support. We need to get money into people's bank accounts. You know, you're going to see a contraction of the economy roughly near 40% in the current quarter. If that's not sufficient enough to tell the senators that they need to move quickly, I don't know what is, right?

We're going to soon pass 40 million people filing for unemployment claims. And it's hard to see how we don't get to 50 million. 25% of those aren't getting their jobs back. I mean, the optimistic scenario here, guys, is by the end of the year, we have a 10% unemployment rate. That's an optimistic scenario, right? So yeah, it's going-- we're going to get a lot more days like this.

BRIAN CHEUNG: Joe, it's Brian Cheung. I wanted to ask specifically about the ideological divide. It seemed like that was even not necessarily on party lines. There was a lot of confusion, I think, in the committee over whether or not the Federal Reserve's lending programs are designed to help companies that may have been insolvent even before that COVID-19 crisis, right?

You have this kind of existential crisis about whether or not the Federal Reserve is picking winners and losers here. Based on Chairman Powell's responses, I mean, what did you gather in terms of the Federal Reserve's thinking on the types of companies they could lend to under the Main Street Lending Program or extend credit to or actually offer loans through the primary or secondary corporate credit facilities?

JOE BRUSUELAS: Well, I think it's a misnomer that these middle market firms-- certain mid-sized firms-- are insolvent or they're their bad bets. They're not. No, they're going [INAUDIBLE]. It's just that they're small firms with big company problems. And let's be honest-- the Fed is lending to fallen angels, right? We just call them by another name. OK, there is going to be some of that, right? And it's good that they exercise oversight on the credit quality of lending. But let's be honest about this. I mean, we've got a Great Depression type shock here. This isn't going to be perfect.

There are going to be firms that are going to get money-- maybe not-- and then there's going to be some losses. Here I think Mnuchin was quite clear about that today-- that they're willing to take the risks around that. They should, right? These programs-- the Main Street Lending Program's going to be with us for a very long period of time. It's not a one-year and done program. It's going to be around for a number of years, because it's going to take a number of years to dig out of this crisis.

So you know, the economy you know, will begin to see more activity as the public gains confidence in testing and treatment. And it's going to be a long, slow grind out of this, guys. That's at the end of the day. So I'm not surprised, Brian, that you saw that sort of oversight.

JULIE HYMAN: Joe, it's Julie again. I just want to close by asking you about China for a moment, because Republican senator Martha McSally of Arizona brought that up with regard to BlackRock, which I have to say was a little bit of a surprise-- where she asked Jay Powell about BlackRock's involvement in or execution of some of the Fed's programs, because it's also a big asset manager that invests in China. Is this a hint of-- I mean, we've already seen some of it, but is it a hint of what more is to come from the administration and the Republicans in terms of trying to de-tangle the US from China? And what implications does that have?

JOE BRUSUELAS: OK, so that's a preview of coming attractions with respect to the campaign. That's exactly the wrong way to go. We'll need the global economy, as you see countries begin to emerge from this, to demand US products. We'll want to sell into those markets, right? That's a good way to cause further turmoil in global financial markets. And it would really put a deadweight on whatever economic recovery we see.

Smoot-Hawley 2-- the Sequel is really not the way we want to go in terms of tariffs and protectionism, right? China is clearly responsible for some of what has gone on. They're going to have to answer to that. This is going to be the worst time for China since the Tiananmen environment. But I think stoking trade wars, stroking finance wars, stroking currency wars, if it would come to that, is not the way we want to go with respect to how we're going to dig out of this.