During a crisis such as the one in which we are experiencing with Covid-19, we learn (or perhaps rediscover) how much of our world functions on the basis of trust. Individuals also reveal their best and worse selves, but I promise not to make this another blog post about President Pinocchio.
In his widely read Sapiens: A Brief History of Humankind, Yuval Noah Harari explores how belief in ideas such as the nation state, religion and money have permitted humans to develop at a far faster pace than would have otherwise been possible through natural selection working its magic via pure biochemistry. Harari refers to these cultural artifacts as “myths” — they are really just shared beliefs.
This got me thinking in my coronavirus-driven isolation of the institutions and services upon which we rely that may be equally intangible. Examples unfortunately abound in today’s news flow: the availability of hospital beds and ventilators for the very sick in the medical world and liquidity (ultimately cash) in the financial world. Banks and other financial institutions exist to intermediate cash flows and desired maturities between borrowers and lenders, and companies and investors. Bank panics occur (and they used to occur frequently) when, typically, depositors lose faith that their bank has enough cash to satisfy all withdrawal requests and begin frantic withdrawal attempts.
The financial system and the world’s economies could not function if banks held 100% of their deposits in cash-on-hand. When we borrow, we rely on banks to lend us money on a longer-term basis — how many of us would take out a 30-day revolving mortgage? However, when we deposit money in our checking or short-term savings or money market accounts, we expect to be able to spend or withdraw those funds on short notice. The US Federal Reserve, in close coordination with central banks around the world, is doing an excellent job in this health crisis to ensure adequate liquidity in the system and prevent a public health crisis metastasizing into a financial crisis.
Until Covid-19 I had not focused on how much of our public health system also functions like a bank. It would be prohibitively expensive for any nation to maintain sufficient hospital capacity to meet a “run on the bank” type demand for medical services. Obviously, the US could not and should not maintain 320 million ICU beds and ventilators or the trained professionals to staff them. However, what is the right number? Financial regulators and the boards of responsible banks spend a lot of time and thought (and stress test their conclusions) to establish what is a safe amount of capital and liquidity to maintain. Good hospitals do the same for the communities in which they operate; however, I believe that the US, Italy, Spain and other nations have discovered this month that they have not done a good enough job mandating sufficient resources at the national level.
Continuing this analogy of the pandemic virus qua bank run, health authorities need to introduce sufficient liquidity into the system by blunting demand (through social distancing and additional hygiene measures) while rapidly increasing supply (through providing additional hospital beds, ventilators, personal protective equipment and testing capacity). These measures are now, belatedly, underway but precious time has been wasted.
Trust is a vital social good when it comes to our health and our finances. When the immediate crisis abates, health authorities and governments around the world need to learn the lessons bank regulators did post-2008 to restore confidence in a system that can only function on a basis of trust.