Virus resurgence menaces economy just as rescue programs unravel

A new wave of cases followed by the looming expiration of enhanced jobless benefits, a ban on evictions and other rescue programs is sparking concern among lawmakers and economists.

Virus resurgence menaces economy just as rescue programs unravel

The resurgence of the coronavirus is threatening to undercut the U.S. economic recovery and upend Americans’ plans to return to work just as the sweeping social safety net that Congress built during the pandemic is unraveling.

That one-two punch — a new wave of cases followed by the looming expiration of enhanced jobless benefits, a ban on evictions and other rescue programs — is sparking concern among lawmakers and economists who say that while widespread business shutdowns are unlikely, renewed fears of the virus alone can slow the economy just as it's getting back on track.

That could dampen hiring and keep some workers on the sidelines of the job market — stalling or even reversing the labor recovery, the centerpiece of President Joe Biden's economic agenda. New unemployment claims jumped last week to 419,000, well above expectations and the highest since mid-May, the Labor Department reported on Thursday.

Biden — whose Gallup approval rating dropped to 50 percent this week, its lowest yet — is already drawing attacks from Republicans over the issue. Rep. Kevin Brady of Texas, the top GOP tax writer in Congress, said the president has focused too much on pushing his “$4 trillion spending binge” and not enough on the virus.

Jason Furman, a former top economic adviser to President Barack Obama who is close to the current White House economic team, said the West Wing is very aware of the risks to the economy from the spike in Covid cases.

“Any problem that has a 5 to 10 percent chance to derail the economic recovery you are looking at very closely and are worried about," Furman said.

He said that concern isn't especially high, however, because even under "the most plausible worst-case scenario," the risk is that the Delta variant "takes what was a very fast recovery and turns it into just a fast recovery."

Another person familiar with the economic team's discussions confirmed that the White House is paying close attention but doesn't consider the virus a significant threat. Biden has been calling on Americans to get vaccinated, mainly out of concern for people's safety but also with an eye out for the economy, the person said.

Biden, speaking on Monday after the stock market tumbled as investors braced for a potential rebound of the virus, said, “We can’t let up, especially because of the Delta variant, which is more transmissible and more dangerous.”

Coronavirus cases have been rising nationwide and are back to their highest level since early May as the highly contagious variant spreads across the country. The sharp uptick has reignited fears of the pandemic, particularly as cases rise among young children who are unable to get a vaccine and even among those who have been fully vaccinated.

“If people don’t feel safe, they’re going to close schools. If people don’t feel safe, they’re not going to go back to work,” said Claudia Sahm, a former Federal Reserve economist. “The recovery — it’s going, but it’s still vulnerable.”

While it's far too early to gauge the fallout from the increase in cases, any Delta-driven jobs slowdown is likely to be most pronounced in blue states, where higher percentages of residents are vaccinated but where people are also less willing to take risks as coronavirus cases rise. A CBS News poll this week showed that nearly 3 in 4 fully vaccinated Americans are worried about the Delta variant, compared to less than half of those who are not fully vaccinated or who have not received any shots at all.

Those same Democratic-led states also have the most jobs left to recover since they had stricter shutdown orders in place initially and then reopened more slowly. Roughly 8 million of the 10 million jobs that are still missing in the economy from before the pandemic are in blue states, said Arindrajit Dube, a labor economist at the University of Massachusetts at Amherst.

The slowdown in jobs growth, then, is likely to be most acute in the states where the need is greatest. And given how much economic activity those states generate, the ripple effects on the macroeconomy will be more severe.

“If you have highly populous parts of the country who have taken Covid seriously the entire time, and those people get afraid, then you have at least a noticeable slowing in the recovery,” said Sahm, now a senior fellow at the Jain Family Institute.

If Delta continues to spread, the economic shock would come as huge swaths of Americans are still struggling to get back on their feet.

While wages have been rising, particularly for low-income workers in leisure and hospitality, those gains have been outpaced by inflation. And more than 1 in 3 American adults have less in emergency savings now than before the pandemic, despite the more than $5 trillion Congress has pumped into the economy since March 2020 in stimulus and relief funds, according to a survey released on Wednesday.

“That really underscores how much we need to restore jobs,” said Diane Swonk, chief economist at Grant Thornton. “All of those issues that really plague low-income households have not gone away. We bought some time, but the clock is expiring.”

The end of various social safety net programs will affect tens of millions of Americans. Survey data from the Census Bureau shows 3.6 million households say they are somewhat or very likely to face eviction in the next two months as the nationwide moratorium expires at the end of July. More than 12 million Americans continue to receive some form of jobless benefits, which will be slashed or cut entirely by Labor Day.

And some 42 million student loan borrowers will need to resume payments in October unless the Biden administration acts — and 2 in 3 say it will be difficult for them to pay the bill, according to a Pew Charitable Trusts survey this month.

The ultimate risk is if those and other programs run out at the same time that a major coronavirus outbreak leads to a pullback in economic spending, a slowdown in hiring or an increased hesitancy to find work for fear of catching the virus.

“If we are to see a significant wave in the end of summer, early fall, then we are likely to see an environment where the economic impact will be much greater if there isn’t additional fiscal support,” said Gregory Daco, the chief U.S. economist at Oxford Economics.

Congress has been preoccupied in recent months not with short-term stimulus but longer-term initiatives, namely a bipartisan infrastructure plan and a multitrillion-dollar spending package for child care, health care, education and climate, Daco said. In short order, too, lawmakers will also have to take action on urgent items including the budget and the debt ceiling.

“Those are likely to be the key focus,” he said. “So there might be a significant disconnect between the potential need for additional fiscal stimulus and Congress’ focus on more medium-term plans.”

In the meantime, the Delta variant is giving Republicans fresh ammunition to rail against the multitrillion spending package they have long slammed as an expensive Democratic wishlist. Brady, the ranking Republican on the House Ways and Means Committee, said Tuesday he’s hopeful the president will now “turn away from his distraction on another $4 trillion spending binge” to focus on coronavirus and the economy.

“I’m worried that almost since Day One, six months ago, [Biden] took his eye off defeating the virus and rebuilding the economy,” Brady said. “The president is scrambling now to make up for that lack of attention, but I worry that it’s too late.”

Source : Politico USA More   

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Crypto-based ‘shadow financial market’ spooks regulators

Watchdogs are warning that some DeFi activities are probably illegal under federal law and pose serious danger to consumers.

Crypto-based ‘shadow financial market’ spooks regulators

New financial services built on cryptocurrency are offering consumers the ability to borrow and trade billions of dollars without the oversight of bankers or their regulators. Washington is now scrambling to catch up, amid concerns of illegal activity and mounting consumer risks.

Decentralized finance, or DeFi, operates on technology that powers digital currencies like Bitcoin and Ether. The services replicate the functions of traditional lenders and exchanges but operate autonomously and automatically across computer networks.

Regulators across the country are now working to get their arms around DeFi, including the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Reserve and the Office of the Comptroller of the Currency.

Watchdogs are warning that some DeFi activities are probably illegal under federal law and pose serious danger to consumers, who are putting their money into systems that have inherently less human oversight and accountability and are vulnerable to cyberattacks.

“I’m very concerned there’s none of the reporting, none of the normal pricing and regulatory limits,” CFTC Commissioner Dan Berkovitz said in an interview. “The bottom line is there’s no free lunch anywhere in the economic system.”

The small but rapidly growing sector — activity is measured in the tens of billions of dollars — is posing a major challenge for regulators who face an unprecedented task of clamping down on an open-source financial network that has grown up completely outside their purview. The basis of modern financial regulation rests on having centralized entities — like lenders and clearinghouses — register with the government and subject themselves to oversight.

“For the first time, you're starting to see DeFi protocols that are starting to set up procedures for borrowing and lending on a large scale,” Alabama Securities Commission Director Joseph Borg said. “It's between unknown participants without any intermediaries … So now the question is, who do we put this on?”

DeFi flouts the old model, and its advocates say that’s the point — a decentralized and automated market will lower costs, increase efficiency and offer more transparency.

Celsius Network CEO Alex Mashinsky, whose crypto finance firm uses DeFi technology, said the services provide a way to "innovate and go around all of these centralized toll collectors.”

“The chronic systemic problem we have in our financial world is the fact that our traditional system, traditional finance, is concentrated, leveraged and too big to fail,” he said.

Among the most popular DeFi options is MakerDAO, one of the longest-running services, which lets users borrow so-called stablecoins in exchange for depositing cryptocurrency-based collateral. Another service, Uniswap, is a decentralized cryptocurrency trading exchange that relies on an “automated liquidity protocol” rather than a central orderbook to facilitate transactions. Like other major DeFi projects, they operate on technology that underlies Ether, one of the biggest cryptocurrencies.

The creators of some of the services are beginning to make contact with regulators. Marc Boiron, general counsel of the decentralized exchange builder dYdX, said in an email that "we have proactively (and voluntarily) communicated with the CFTC prior to the deployment of all of the protocols" and "have always carefully considered the laws applicable to dYdX." He said the first protocol dYdX developed required U.S. users to follow CFTC rules for retail commodity transactions.

DeFi services have seen rapid growth over the past year amid the cryptocurrency boom, with more than $50 billion "locked" in services based on Ethereum, the network for Ether. Major centralized cryptocurrency exchanges like Coinbase, which has been at the forefront of offering digital currency trading to the masses, have begun to let their customers deposit funds and earn returns on DeFi.

Square CEO Jack Dorsey announced earlier this month that the digital payments giant planned to create a new business around an open developer platform “with the sole goal of making it easy to create non-custodial, permissionless and decentralized financial services.” Even established Wall Street banks have begun to look at the technology as a way to revamp their systems.

But the rapid rise of DeFi is raising growing concerns for lawmakers and regulators, who are signaling a possible crackdown amid increasing evidence of consumer risks.

Recent research has raised red flags about the absence of human oversight at DeFi services and technical vulnerabilities, including attacks that drained millions of dollars from DeFI protocols.

"In DeFi, intermediaries are largely excluded in favor of transparent code, presenting regulators and policymakers with complicated decisions as to how to assess transactions (often bilateral) for which no clearly identified party may be regulated," Georgetown Law visiting scholar Linda Jeng and Castle Island Ventures partner Nic Carter said in a paper released last month.

Sen. Elizabeth Warren is pressing SEC Chair Gary Gensler to rein in DeFi activities. In a letter this month, the Massachusetts Democrat said "scams have surged" on DeFi platforms, citing an estimate from analytics firm CipherTrace that there was $83 million in DeFi fraud during the first four months of this year.

In a July 21 speech, Gensler warned that services offering crypto tokens backed by securities and operating like derivatives — "whether in the decentralized or centralized finance space" — must work within the agency’s rules.

Berkovitz, a Democratic commissioner at the CFTC, has been among the most outspoken about the urgent need for officials to come to grips with what he says could become an "unregulated shadow financial market." He argues that trading on DeFi platforms is likely happening illegally because it's not abiding by the requirements of the Commodity Exchange Act, which imposes safeguards on derivatives transactions. He revealed this month that his agency, which regulates the trading of futures and swaps contracts, was looking at DeFi across its various divisions.

"If there are loopholes they are driving through, there may need to be legislation to close them," he said.

Officials representing the SEC, CFTC and the International Organization of Securities Commissions were briefed by DeFi players in June, a sign of growing scrutiny.

Other federal agencies that oversee the banking system are also beginning to delve into DeFi, including the Office of the Comptroller of the Currency and the Fed.

"While DeFi, by definition, is decentralized and does not necessarily rely on the banking system, there are linkages, which are part of our review through the lens of responsible innovation, cognizant of the potential benefits of new technologies while focused on understanding the potential risks and use cases," OCC spokesperson Bryan Hubbard said.

State officials are urging their federal counterparts to act.

"You've got all sorts of potential possibilities and potential risks that we have got to take a look at," said Borg, the Alabama securities regulator. "It's going to be a congressional, federal mandate, by SEC, CFTC, to come up with some of this stuff."

The possibility of crackdown is already seeing pushback from some federal policymakers who champion free markets. SEC Commissioner Hester Peirce, a Republican appointee, said removing intermediaries improves resilience in the financial system. She wants to avoid "just classifying DeFi in one big bucket and saying it's all the same thing."

Crypto industry groups are also urging regulators to proceed with caution.

"I don't think there is a way to shoehorn in decentralized finance into the existing framework that depends on the regulation of intermediaries and gatekeepers," said Miller Whitehouse-Levine, director of policy at the Blockchain Association.

One of regulators' biggest challenges will be deciding to what extent to police the software underlying DeFi protocols, in light of free-speech concerns.

Jerry Brito, executive director of crypto advocacy group Coin Center, said restrictions on computer code would trigger opposition from his organization and others over the belief that it's protected by the Constitution.

"Writing and publishing software is First Amendment-protected free speech," he said. "There's no compromise to be had on that.”

Source : Politico USA More   

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