Stabilize & Recover is a strategic national plan for managing crises such as the COVID-19 pandemic. The objectives are to minimize shocks to our financial system so resources can be concentrated on addressing national imperatives. Key differences with other mechanisms are that Stabilize& Recover provides support directly to those most in need, US families, and it can be implemented quickly (as little as an hour).
Stabilize & Recover is necessary because conventional mechanisms governments and central banks use to manage financial crises are ineffective when dealing with non-financial crises such as the COVID-19 national emergency.
The key benefit of Stabilize & Recover is that it completely eliminates the need for layoffs and bankruptcies. As the name suggests, there are two phases:
- Rather than layoff or furlough employees, businesses place some or all employees on “strategic leave.”
- During strategic leave, all employees, including part-time employees and contractors, receive full salary (including approximation of gratuity-based salary) and benefits, up to $250,000 per year.
- Businesses receive Strategic Stabilization Loans, “SSLs,” up to 110% of payroll. i.e., businesses receive sufficient loans to cover their entire payroll, if needed, as well as fixed and variable overhead.
- SSLs are paid back after a grace period following the end of the national emergency.
- a. E.g., the grace period for the COVID-19 national emergency could be set to 1 year for each month of the national emergency. If the national emergency lasts 6 months, the grace period will be 6 years.
- The interest rate for SSLs is 0% until the end of the grace period.
- All loan balances are reduced by the amount used to pay employee salaries and benefits while on strategic leave.
- a. E.g., if a business borrows $100,000 and uses $90,000 to pay for salaries and benefits of employees on strategic leave, the loan balance is reduced to $10,000.
Stabilize & Recover is a mechanism implemented and managed by the US Federal Reserve (the “Fed”). It is a form of “Quantitative Easing” (“QE”). QE a well-understood mechanism the Fed uses to stimulate the economy to prevent or recover from financial crises. The Fed has full discretion to implement QE mechanisms and requires no authorization to do so. Consequently, Stabilize & Recover can be implemented in less than an hour – the time required for the Fed to write and issue a press release. The specific implementation process is the following:
- Businesses secure SSLs from a bank by providing appropriate payroll information.
- The bank sells the SSLs to the Fed for 102% of face value. i.e., banks earn a 2% margin issuing SSLs to cover processing costs, etc.
- Businesses use funds provided by SSLs to continue paying employee salaries and benefits while they are on strategic leave, to pay fixed overhead, to pay required ongoing variable expenses, etc.
- Families continue meeting their financial obligations with no interruption.
The full implementation of the Stabilize phase is shown below.
Minimize shock to financial systems – Stabilize & Recover will eliminate concerns about financial security for US families and critical economic infrastructure such as small businesses during national emergencies and it will enable the nation to focus on addressing the crisis.
No job losses and no bankruptcies – There will be no need for any employee to be laid off or any business to declare bankruptcy as a result of the national emergency.
Elimination of systematic collapse – Stabilize & Recover will enable families to continue paying all their expenses and prevents systemic problems from developing. E.g., families can continue making uninterrupted payments for mortgages, credit cards, health care, food, etc. As a consequence, national emergencies do not expand into financial catastrophes such as banking collapse.
Immediate recovery – Stabilize & Recover will result in immediate recovery when the national emergency is lifted. There will be minimal long-term damage to the US financial system.
Cost – Stabilize & Recover is extremely cost effective. For example, on March 15, 2020, the Fed announced a QE program in which they will purchase $700 billion of existing government debt and mortgage-backed securities. In the current COVID-19 national emergency, $700 billion will fund Stabilize & Recover for at least 8 months.
Effective – Stabilize & Recover will provide financial support to the people who need it the most – families! QE mechanisms can provide effective long-term stimulus for the economy, but they provide no meaningful relief to families in a timely manner.
Timely – The Fed can implement Stabilize & Recover immediately, at any time. Banks are already configured to provide loans to businesses and to sell loans to the Fed through QE mechanisms.
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Robert C. Whitehair is the author of American Buyout, the proposal on how to fix our broken economy.