The world needs to limit economic activity to allow for social distancing, which will slow the spread of Covid-19. This should be something a prosperous society can do. “Right now we still have plenty of stuff,” Bloomberg’s Joe Weisenthal wrote on Twitter. “And if we were to take a one- or two-month pause on building homes or cars, it wouldn’t be the end of the world.”
The problem, says economist Larry Summers, is that “economic time has stopped, but financial time has not been stopped.” Bills keep coming due and most Americans aren’t prepared—39% of US households couldn’t cover a $400 expense without borrowing money or selling something. The median small business in the US has enough cash on hand to last just 27 days. For businesses and households alike, putting work on hold for a couple of months would be a disaster.
This is the sort of problem financialization is supposed to help with. “In finance you can time travel,” says University of Michigan professor Gautam Kaul in his introductory finance course. Borrowing money can shift spending from the future into the present; lending it can do the opposite. But when everyone wants to time travel in the same direction, things don’t work as well. All that demand for loans drives up prices just as investors, spooked by uncertainty, are searching for safe places to park their money. The market, left to its own devices, will only lend on onerous terms.