Why are crises not avoidable?

Technically, all economic and financial crises are avoidable. However, they impact our lives when authorities are not equipped with necessary tools.

A long-recession triggered by COVID-19 does not result from economic parameters, yet from limited policy options.

In most countries, laws forbid governments to borrow from central banks. For developing countries, cost of borrowing from financial markets would be high as foreign investors return to safe assets in times of COVID-19.

The US Government requires Congress approval for a rise in public debt. At this stage, politics involves the formulation of fiscal policy.

It is well known that a recession occurs when an economy produces less than its potential due to the lack of demand. In a fiat currency economy, stimulation of demand is simple and easy: 'The central bank prints money and distributes to the people'. By doing so, there is no demand that cannot be bolstered. Nevertheless, laws hamstring the economic policy to prevent abuses.

First of all, a central bank cannot print money in return of nothing. That is, it can either lend to the financial sector or government. In recessions, financial agencies retrench credits despite the zero funding rate of the central bank. They rather preserve their capitals against soaring delinquencies. However, as set forth here, individual action of each bank further piles nonperforming loans, exacerbating the recession.

Macroprudential authorities can compel banks to raise credits to households and firms, yet banks can bring such an exercise to court. While the credit channel is locked, the remaining option is governments' borrowing. In most countries, laws forbid governments to borrow from central banks. For developing countries, cost of borrowing from financial markets would be high as foreign investors return to safe assets in times of COVID-19.

Via purchasing treasuries from secondary markets, independent central banks can lower the cost of government borrowing. Nevertheless, issuing public debt is also restricted by law in many countries. The US Government requires the Congress approval for a rise in public debt over the limit. At this stage, politics involves the formulation of fiscal policy. While President and Congress are from rival parties, as it is now, what is right from the economics point of view may not be easy to put into action.

To sum up, a long-lasting recession triggered by COVID-19 does not result from economic disabilities, yet from limited policy options. Through monetary expansion, any lack of demand can easily and cheaply be compensated. It is checks and balances of democracy and laws that restrict policy tools.