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Ideas Made to Matter
Top bank regulator calls for quick reopening of the economy
As COVID-19 cases rise again in the U.S., many Americans are wondering: Will Congress approve a second round of stimulus to help struggling consumers and businesses?
Brian Brooks, acting head of the Office of the Comptroller of the Currency (OCC), weighed in on the economy during a recent Q&A hosted by the MIT Golub Center for Finance and Policy. Brooks was interviewed bya professor of the practice of global economics and management at MIT Sloan.
“Whether we have another stimulus package or not, long term we need to learn to live with the amount of risk that’s the normal amount of risk in our world in a way that doesn’t ruin lives, doesn’t ruin businesses, and ruin people’s prospects for a prosperous future,” Brooks said.
During their conversation, Brooks and Orphanides shared their thoughts on how to reopen the economy. Brooks also discussed the effectiveness of the first stimulus package that was rolled out earlier this year and suggested a few ways that banks can step in to help borrowers.
Reopen the economy now or wait?
One of the biggest debates during COVID-19 has been determining how and when to reopen businesses, given that physical proximity can be dangerous during a pandemic. State officials are currently reevaluating which businesses should close and which should open, as cases in the U.S. increase for the third time.
Brooks argued for a quick reopening.
“The longer we stay closed, the harder it will ever be to get people’s psychology back to a normal psychology,” Brooks said, referencing the effect of lockdowns on state economies. “I just don't see how this can be reasonably debated. This can't go on forever.”
California, Illinois, and New York “are still in double-digit unemployment territory,” Brooks said, calling them “the heaviest lockdown states.” He said the unemployment rate “has fallen faster than anybody forecast.” The unemployment rate hovers at 7.9% nationally; in April, the rate was around 14%.
Orphanides challenged that take, saying it doesn’t make sense to open the economy when COVID-19 hasn’t been contained.
“If we turn the economy on without really dealing with the health issue, we still will have a recession,” Orphanides said.
Many economists have predicted a reverse checkmark recovery, with a sharp drop followed by a longer, slower upward trajectory. Brooks envisioned a V-shaped rebound, which suggests a more rapid recovery, but said the situation depends in part on actions taken by Congress.
“That may or may not hold; we may not get back to normal without some other fiscal stimulus,” Brooks said.
High marks for the first round of stimulus
Back in the spring, Congress approved a $2 trillion stimulus bill that provided $377 billion in loans to small businesses and established a $500 billion government lending program for distressed companies. Brooks said that money from the Paycheck Protection Program and other programs helped keep businesses afloat, even with large parts of the economy shut down.
“Many people who took out PPP loans, or received the benefits of salary payments made possible by [those loans] saved the money,” Brooks said. “They didn't spend it on a bender in Las Vegas. They put it in their bank account, and we at the OCC can see that it's still sitting in part in those bank accounts. There's a lot less dry powder in people's accounts today than there was three months ago, but there's still [money].”
Banks should be flexible with borrowers
More than 5 million business owners borrowed a total of $525 billion through the Paycheck Protection Program, which used banks and other lenders as conduits to issue loans. Brooks said that banks should be flexible and grant loan extensions, rate and term changes, and other kinds of loan restructuring, calling these measures “key at this juncture.”
“We came out with guidance at the very beginning of the pandemic, encouraging banks to restructure loans, to aggressively market forbearance programs for borrowers who are eligible for forbearance, and to do all of those things on the understanding that we will not criticize their loan-origination activities simply because a loan that was good at origination is now going to default,” Brooks said. “We realize the loans are not failing because of the bank’s fault — the loans are failing because the government turned off the borrower’s ability to repay.”
Orphanides suggested that more could be done on a government level.
"This is where cooperation between the Treasury and Congress actually could be helpful,” Orphanides said. “If we could arrange a program with the Treasury, approved by Congress, we might be able to provide banks with the additional flexibility to do such restructurings.”
“I'm going to do everything I can to make sure banks are appropriately reserved against future losses,” Brooks said. “The good news is they went into crisis well-capitalized, and I think they're taking a very clear-eyed view of all this. But banks are not the ones who generate the growth in the economy, and if there isn't economic activity, banks will have a problem.”