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Financial Markets Continue Sell-Off Because Of Coronavirus Fears

NOEL KING, HOST:

Here is a truth about stock indices - they swing. They go up and down, and we have gotten used to them swinging back up. But fears about the coronavirus have led to days of significant market selloff. So the question now is, how serious is this situation? To help us answer that, we called up Megan Greene. She's an economist and a senior fellow at Harvard's Kennedy School of Government. Megan, good morning.

MEGAN GREENE: Good morning.

KING: So if you think about what we've seen in the last 18 months - the trade war had the market swinging all over the place, the occasional talk of a recession saw markets shedding - they do fall. Is something different about this situation?

GREENE: Yeah. So this situation is highly uncertain. You know, none of us knows exactly how long this virus will last. There's not a natural peak, necessarily. So often flus die when the winter ends, but the fact that the coronavirus has been thriving in Australia and Singapore suggests that might not be true. And so that means it's really difficult to tell how far this will go and how far it will spread. And so it's hard for economists and markets to know exactly how disruptive it will be.

Up until a few days ago, the markets have really just assumed that this would be a temporary blip and that they've been really focused on the demand side of it. So they've been looking at the second-largest economy in the world, which has been at a standstill for at least five weeks, and saying, well, that's going to be a huge hit to demand and that, you know, when we go ahead and contain this, that there will be a pent-up demand that gets released. And so a year from now, you know, that demand will have been a blip, and we'll hardly have noticed.

Now they're more focused on the supply side of the issue, and that's because China has been really closely integrated into everybody's supply chains. And so if you're a company in the U.S., for example, and you're reliant on China for a single part to create your final product and China shut down, you can't get your parts, and so you can't deliver things to your customers. And so now firms in China and firms in the West are struggling to meet their contracts and to deliver products particularly on time because of the supply chain disruptions. And no one's really sure how to revamp those up - how to ramp them up and how long this will last. And so that's a huge uncertainty.

KING: OK So basically, it's interesting - we've had medical professionals on the show telling us the problem with this virus is uncertainty in terms of how it spreads, in terms of how long the incubation period is. Uncertainty is exactly the same problem when it comes to the economy.

GREENE: So yes and no. There's some types of disturbances in the economy that policymakers are able to address. So for example, demand-side issues - when you go ahead and have a hit to demand, central bankers can step in or governments can step in to stimulate the economy to provide some kind of demand. Now, when you have an issue like this, where global supply chains are gummed up, we don't know how to fix that easily.

So one option is you could shift your supply chain. So instead of using a company in China for a part, you could try to find one in Mexico, for example. And the issue with that is that, actually, if that were easy to do, companies would have already done it once the U.S. started imposing tariffs on China just over a year ago. So if global supply chain shifts were easy, we've already done that. And so now firms who have to address that issue are looking at much more expensive, much more difficult issues.

KING: Is there anything that central banks can do?

GREENE: Yeah. Unfortunately, central banks are really well poised to deal with demand-side problems, but when you have a supply-side problem like this, central banks just don't have the tools. So, you know, central banks can't make vaccines in this scenario. And so if a central bank cuts rates, which is what they would normally do if growth is flagging, that doesn't get people who are really worried about an epidemic or a pandemic to go back to the factory to make a part or to go outside and buy stuff. There's just no tool that central banks really have to make that happen.

And so while investors up until recently have been really relying on this being a temporary issue, they've also been relying on central banks to step in and clean up the mess if they're wrong. And as it turns out, central banks just don't have the tools to address this.

KING: Megan Greene is an economist and a senior fellow at Harvard's Kennedy School of Government. Thanks so much for joining us, Megan.

GREENE: Thanks for having me. Transcript provided by NPR, Copyright NPR.