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The COVID-19 pandemic’s rapid spread continues to impact the U.S. economy. Gary Cohn, Former Director of the United States National Economic Council joins Yahoo Finance’s On The Move panel to discuss the economic outlook amid the virus outbreak.
ADAM SHAPIRO: To discuss how we get through this crisis economically and then reopen this economy, joining us in a Yahoo Finance exclusive is Gary Cohn. The former director of the United States National Economic Council. Gary, it's good to have you here. And I got to tell you with all of this incredible news starting with the Fed, you had just what? Two or three days ago in "The Wall Street Journal," you said that these were the kinds of steps the Fed might take. But you warned practices forged over decades at sovereign wealth funds offer lessons. Their model combines, rigorous disclosure, independent oversight boards, and investment decision making by professional staffs. What can the Fed learn as it now gets ready to lend in ways it's never lent before?
GARY COHN: Adam, thank you so much for having me this morning. Look, we try to make three really important points in our op-Ed earlier in the week. And I think you just hit on them, but I'll reiterate them. Number one, the Fed is moving with just extraordinary speed. And they continue to do everything within their sights to help stabilize the economy. But they're moving into uncharted territory for themselves.
They are now taking security as collateral that they've never taken, they're now in the loan origination business, something that they've never been in before. As they move into these businesses, which is quite appropriate for them to be in given the current state of economy, there's three basic principles that I believe and we believe they need to follow. A, they need to get a professional staff that knows how to originate loans and knows what commercially acceptable terms would be.
Number two, they need some oversight. And the good news about the Fed if the Fed is made up of many regional banks, regional banks have independent boards. Those board members have been vetted for over their complex. So the Fed could go pull people off those independent boards for an oversight team. And number three, and almost most importantly, they need disclosure. The Fed needs to disclose to the public who they're lending to, the amounts they're lending to, and what the terms are. And as long as they follow those three basic principles, I think they're doing the exact right thing and we'll all be better off for knowing what they're doing.
ADAM SHAPIRO: You know, you bring up some interesting points. But I remember in the financial crisis 2008, being at the White House when the first tarp program in Congress failed, the speed with which the Fed and treasury are acting now is just miles ahead of what we witnessed 12 years ago. Are they rushing too fast with these extraordinary measures? I mean, they're going to buy municipal debt. That's never happened before.
GARY COHN: They're not, they're not rushing too fast. This is not the same events as 2008, this is a global pandemic. This is a disease, a health care crisis. This is having a dramatic impact on the United States. We now have 97% of the population in the United States being told to stay at home. They're actually being told to stay out of the US economy. They're being told only buy the necessary goods that they need, which is basically food and other basic necessities. And don't go out and spend any money, you actually can't go out because the stores are open.
So we're in essence being told to shut down the entire economy for the long term good and health of the country, which is very important and everyone's doing it and we're doing it well. So when you really put your economy into a dead standstill, the Fed has no choice but to act very quickly. And I think they're acting quite appropriately as well.
JULIE HYMAN: Gary, it's Julie here. On the oversight front, I want to ask you not so much about Fed oversight but of the oversight of the congressional stimulus plan because as you know, the president has removed the person who was first appointed to oversee the portion of all the moneys as part of that. What's your level of confidence at the oversight of that is going to be rigorous enough?
GARY COHN: Well, Julie, look, there's two parts of the oversight. One, there's an Inspector General, which the president has removed. But two, there's also a board. There's a five person board that was put in the care's legislation. That board has yet to be appointed, but I think that board is also going to have a huge degree of oversight in what goes on with this money.
The other thing that I'll remind people is outside of the PPP program, the Paycheck Protection Program, the vast majority of the money in that program has not gone out the door yet. So as far as oversight, there's not that much to oversight. Unfortunately, I wish there was more to inspect right now because more money had gone out.
JULIE HYMAN: And, of course, part of the reason that the money hasn't gone out is because there have been a lot of problems with paperwork, with bureaucracy, with the banks not necessarily being ready or being overwhelmed by what the influx of volume they've been getting, requests for that. So what can be done about that?
GARY COHN: So this is a really interesting conundrum and one that is going to deserve a lot of discussion. And there'll be a large post-mortem on this. But remember after the '08 crisis, we spent the next two plus years regulating our banking system in the United States. And what we're seeing now is a lot of the potentially unintended consequences of the regulation of '08.
So banks today are very concerned about the size of their balance sheet and the size of their asset base and how many loans they originate and put on their balance sheet. Banks cannot just grow their balance sheet today because they've got leverage ratios that they have to abide by, and they've got capital stress tests that they have to abide by. All these things came into place after '08 to make our banks safer and sounder.
It's my opinion that we should relax some of these regulations in times of stress. Many of these regulations were put on in a unstressful period of time. And what our regulators need to do now is say, look, we're not in an ordinary time, we need to give banks more latitude on their liquidity leverage ratio and on their stress capital ratios. And then I think banks could be a lot more aggressive in lending out money.
JULIA LA ROHCE: Gary, it's Julia La Roche. I want to get your take on how we can put the economy back on the path to get to where we were pre-coronavirus. What is it that needs to be done? What do you think the next fiscal package needs to look like? And just what are some action steps to get the economy reopened?
GARY COHN: So look, this is going to be a long process. This is not going to be an overnight big bang. And much like how we got into the shutdown of the economy, it's going to happen incrementally, it's going to be very involved, and it's going to be different. Every state and every city is going to have to approach this quite differently, as they have in how we have told people-- this shelter in place, how we've told people to stay home, we've had a different path depending on what state you're in, what city you're in, what part of the country you're in.
The mayors and the governors are going to play a crucial role in this. There will be certain cities and states that can open much quicker than other cities and states. So if you think of more rural states where people are not as densified and they're spread out, those states will be able to open quicker than states where you're highly densifed, where you're dependent on public transportation, where you're dependent on elevators to get people in and out of buildings.
So I think what we're going to need to do is we're going to need to look at each of these cities and we're going to have to evaluate them to what the risk is. Simultaneous to that, we're going to have to have a very robust testing mechanism to back up the re-opening of the economy because we're going to need to know very, very quickly if we get a resurgence in infection in the country.
ADAM SHAPIRO: Gary, I'm curious, you just mentioned a testing program, yet there's a report that the federal government may be cutting the money it's providing for testing. And it is the key everyone says, widescale testing. So what happens to make sure that we get that testing in place to go back to work?
GARY COHN: I don't think we can go through a full fledged reopening of our economy without testing. We would jeopardize ourselves going back into a another full fledged outbreak in the United States and then having to shut our economy down again. That would be the wrong answer. The right answer is to start incrementally bringing people back to work in a very thoughtful process.
Big businesses are going to have to think of dividing their workforces maybe into A's, or quarters, and say, hey, the A team comes in Monday morning, the B team comes in Monday afternoon, and then the C team comes in Tuesday and the D team comes in Tuesday afternoon. But the Monday crowd and the Tuesday crowd never cross because if someone gets sick in the A and B crowd, we don't want them to contaminate the C and D crowd.
But if we don't have testing when someone starts feeling ill and we don't know what group to isolate, we're going to end up having to isolate everyone again. And we see the impact of having to isolate everyone. It's going to be the only choice is to isolate everyone.
BRIAN CHEUNG: Hey Gary, it's Brian Cheung here. So we see the Federal Reserve trying to kind of cover the whole on all these different markets. Some might be showing stress, whether it's US treasuries or Muni markets as of today. I'm wondering from your vantage point just with your contacts on Wall Street, what's the biggest concern for you from a liquidity standpoint? And A, do you think that Congress should be maybe appropriating even more money to the Fed since it already blew through almost half of the appropriated money today with the facilities that have been announced. And secondly, what do you think they should be targeting?
GARY COHN: So look, I think at this point the Fed has basically gone off to after every asset class that we have except equities. And I'm not saying that they should go after equities. They are putting money into every asset class that really matters. They're already down into high yield corporate bonds, or an investment grade corporate bonds, or in municipal bonds. They're providing an enormous amount of repo money for the treasury market.
And the Main Street Lending Program that they announced today is also very crucial. We shouldn't overlook that. Remember, we started with the small business plan, which was companies 500 employees and less. And then we had a large business plan, which the treasury and the Fed will be giving out. That's the money that can be levered up to $5 trillion. But there was a gap in the middle, there was sort of a donut hole there.
And today with the Main Street Lending Program, the treasury and the Fed have plug that hole where they'll now be able to lend to businesses between 500 employees and 10,000 employees. So at this point, I think the Fed has basically covered all bases that are obvious. That said, if something appears in another day or another couple of days, the way the Fed has been reacting, they will go and provide liquidity for that as well it looks like.
JULIE HYMAN: Gary, Julia again. So it seems like the Fed has done a lot, Congress has done a decent amount and is probably going to do more. It seems like at this point, it's up to science, it's up to the doctors, it's up to folks to do more testing, to come up with a vaccine, et cetera. And Axios reported this morning that there may be some conflicts arising in the White House. They quoted a senior health and Human Services official as saying, talk of reopening the economy at this point is, quote, "Not just myopic, but flat out ridiculous." As someone who was, perhaps, no strangers to struggles within the administration, who do you think wins here between those who are pushing for a prompt, maybe even May 1st reopening of the economy, and the folks in the medical community who are saying, wait, we have to be much more measured about this.
GARY COHN: Julie, what I think the answer is this is not a one size fits all. They both might be right. When you look at the US economy, we are a very large country. We're something like 4 million square miles in this country. I think we have to look at each of those square miles differently. So when you think of North Dakota, which has a landmass greater than New York and 700,000 people there, you're going to have a different economic trajectory than a New York City with eight plus million people in a very small, tight area where people have to ride subways and buses to get to work.
So in some respects, we will open up certain parts of the country and certain parts of the economy much faster than other parts of the country and other parts of the economy. So in many respects, they're both right, it just depends how you're looking at it. I do not think there can be a big bang answer where we say, OK, today's the day and we're going to flip the switch and everyone's going to go for him staying home and only buying essentials to going out to dinner and going to movie theaters. I don't think that's practical.
ADAM SHAPIRO: You know, it's interesting though, Gary, because the metro areas like New York, San Francisco, LA, Chicago, something like a quarter of GDP generated here, you've said that all of this is a wake up call for Congress. And look, you were part of the team that crafted one of the largest economic booms in US history in recent memory. Would you go back to Washington? Have you been in discussions maybe with the White House about whether we need some kind of Czar for some kind of US Marshall Plan when all of this is over?
GARY COHN: Look, I've been talking to anyone and everybody in Washington who has reached out to me. And I'm doing everything I can to be helpful to everyone.
ADAM SHAPIRO: Would you go back?
GARY COHN: No one's invited me to come back.
JULIA LA ROHCE: Gary, it's Julia La Roche again. I just want to dig a bit more into this, what is it that gives you the confidence that the economy can get back on track? Because I'm just wondering if some of the habits maybe from the folks within quarantine might become sticky. What is it that will help really jumpstart the economy, especially the consumer?
GARY COHN: So we are a consumption based economy. 80% of our employment, 80% of our GDP is consumer based. That's the way we have built our economy. Now look, that's going to change a little bit. One thing we have learned in the last two months here is we're going to have to get back into the manufacturing of strategically important goods in the United States. And I've been arguing that for a long period of time that we've got to figure out what our strategically important essential goods.
And we have to incentivize companies to manufacture those here in the United States so we can take care of ourselves. But the US population, we are basically natural consumers. We like to go out and consume, we like to buy things, we like to go out and be entertained, we're used to going to theme parks, we're used to going to movie theaters, we're used to going to bars and restaurants, we're used to taking our kids out for fast food, and getting that stuff. And look, we've got a long history of decades and decades of living through different dislocations in our economy and consumers coming back into the economy at some rate and at some speed.
I'm not going to sit here and tell you what speed and what rate they're going to come back. But I'm confident enough to know that over time, people will return back to their normal habits. I was having a discussion with my wife last night about Disney and Disney theme parks. And she believes-- and she convinced me last night, that people were going to go back to Disney theme parks. All the kids right now who are downloading Disney+ and watching those movies are going to want to go back and visit those characters and see those parks.
JULIE HYMAN: Gary, there's wanting to and there's being able to. And I think one of the other interesting trends of this pandemic, especially as we start to get more and more data is how it's affecting under-served populations. So for example, the death rate among African-Americans is larger than in the greater population. We've seen, I'm sure you've seen, the pictures in New York City of the folks who still have to go to work who are packed onto the subway in which what's clearly not social distancing. What is this going to do to the issue of income inequality and racial inequality in this country coming out of this thing?
GARY COHN: Look, this issue was here before the this pandemic. It's now being brought further to light because as we see where the disease is hitting and what groups are most affected, we're once again reminded of the inequality of health care in the United States and the inability to get health care in certain parts of the country. And I think this is a another wake up call for us that we've got to treat our citizens more fairly and people have to have access to health care and they got have to have better living conditions.
But this is not a new issue. This is an issue we've been dealing with for a long time. And this is, once again, another reminder of that issue.
BRIAN CHEUNG: Hey, it's Brian Cheung again, I want to touch on infrastructure really quickly. It seemed like there was some optimism that Congress can work on something before this phase four kind of really took on the form of just coronavirus relief part two. I'm wondering if that's a role that you think should be being played as the Senate still tries to work through getting something done as we continue to see the economy roll out of this.
GARY COHN: Well, I think you all know, I have been a huge advocate of infrastructure for the last three years. The United States infrastructure is in a dire state. And by that I mean all we have done for the last 30 years in the United States is we have done maintenance on our existing infrastructure. No one has come up with a new master plan in the United States and said what should our infrastructure look like.
I think it is past time in the United States for us to sit down and say, what should our infrastructure look like in the United States and how do we get there. One thing that may come out of the coronavirus is people may demand different forms of transportation. So when I think of one of the things that's lacking in our country and one of the things that I would pursue in an infrastructure bill is high speed rail.
So why do we have airplanes flying short haul routes in the United States, sort of 350, 400 mile routes Northeast quarter, the Westcoast quarter, Texas, all of these hour, hour and a half flights. After we've lived through this coronavirus, how many people are going to want to get on airplanes? Less people are going to want to get on airplanes, but more and more people would want to get on trains that are less densified where you can bring fresh air into trains.
So if we're talking about an infrastructure package where we're saying how do we help our economy, how do we help our environment, and how do we help our people, I think that would it be an enormously great boost to our economy and help our country out.
ADAM SHAPIRO: Gary, as we wrap up with you, I just got to say I think some people listening right now may be wondering why you're not running for office since you've already served in the public domain. But in this last question to you, we've all been, I think, pleasantly surprised with the speed with which Secretary Mnuchin has helped shepherd through the crisis and the measures to save this economy. If you could advise Secretary Mnuchin or the president, if you had that one phone call, what would you tell them?
GARY COHN: So look, I think Secretary Mnuchin and the Fed and the president economically have done everything they should be doing. They continue to look at ways to provide income and liquidity back into the economy. So the programs that they have instituted so far are the right programs. The one thing I would wish and I would hope for is that the money could get out quicker.
We're talking about a another stimulus bill. What I would guess, I don't have data on this, but I would guess less than 20% of the first stimulus bill is out. And I'm probably high at 20%. So I would like to see 80% on the first stimulus bill get out and into the economy before we start talking about the second stimulus bill. But their intention could not be better. What they're trying to do is exactly the right things.
ADAM SHAPIRO: Gary Cohn is the former director of the United States National Economic Council. We appreciate your insight here on Yahoo Finance. All the best to you and your family, Gary.
GARY COHN: Thanks, Adam. Thanks for having me.
ADAM SHAPIRO: All right. We are watching a rally on Wall Street right now. We're going to have more for you right here on Yahoo Finance after this.