Option-Based Credit Spreads Signal a Recession, but the US Stimulus Will Soften the Blow

Over the past month, option-based credit spreads spiked and remain at elevated levels. The surge signals that a recession is at our door, but its dampening over the past week suggests that the unprecedented stimulus may mitigate the blow. In the last week, the likelihood of a recession in the next 12 months has come down from 100 percent to 73 percent. 

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The Case for Lockdown: in Italy’s Lombardy, It Can Reduce Covid-19 Potential Fatalities from 160,000 to 25,000

According to an analysis by Bocconi University professor Carlo Favero, the number of people infected with the coronavirus in Lombardy, Northern Italy, is 120,000, while official figures put it at around 24,000. Hospitalizations will peak in the second week of April. With a fatality rate of 2 percent, casualties will still rise from the current 5,400 to 25,000. The alternative scenario, with no lockdown, would be much more dramatic, with a predicted cumulative toll of 160,000.  

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Testing People and Targeted Isolation: How to Save More Lives (and the American Economy)

Nobel laureate Paul Romer’s model shows that if we use a test to determine who gets put into isolation, the fraction of the population that needs to be confined and isolated will be dramatically smaller. These benefits are available even with an imperfect test and without any contact tracing. It does take frequent testing, however, with each person getting re-tested roughly every two weeks.

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A Special Capitalisn’t Episode: A Cost-Benefit Analysis of the Economic Shutdown

One of the prominent economic debates to emerge during the coronavirus outbreak has been whether to continue with shelter-in-place measures that are hurting the economy but, hopefully, slowing the virus’ spread. Luigi Zingales and Kate Waldock discuss a cost-benefit analysis of social distancing and economic shutdown with Hoover Institution’s Russ Roberts. 

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The Economics of the Covid-19 Bailout: a Webinar

Princeton Professor Markus Brunnermeier and Nellie Liang, the former director of the Division of Financial Stability at the Federal Reserve, discuss the legacy of policy reaction to the 2008 global financial crisis and why this crisis is different. What is the limit of Fed intervention? What is the role of the Treasury in emergency liquidity programs? How do new measures to support corporate credit work?

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From Most No-Brainer to Most Complicated: A List of Policy Proposals to Mitigate the Virus’ Impact

Policymakers need to figure out which sectors we wish to keep up and running (food, health care), which sectors we want to contract rapidly but bounce back rapidly as well (education), and which sectors we do not want to protect at all and would be willing to see perish.  

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This Is Not a Financial Crisis, So Why Should We Bailout Wall Street (Again)?

Republican and Democratic Senators reached a deal on a $2 trillion bill to help businesses and people hit by the coronavirus outbreak. But the bill also includes slush funds to bail out market funds and guarantee trillions of dollars of risky bank debt. At the same time, millions of small and medium-sized businesses are going to have no access to cash and revenue freezes, because of the pandemic and economic restrictions.

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