Fiscal stimulus needed to jumpstart the economy

Global economies consider bold fiscal policies

Greg Davis: Joe, when we think about the fiscal response the U.S. will take, how significant do you think it will be as a percentage of GDP? Do you think that type of policy would help us return to recovery in the economy?

Joe Davis: It's actually one of the most important questions right now facing the markets. You know, if you would've asked me this time a month ago, I would've said 5% of GDP, which in the United States is $1 trillion because our GDP is roughly $20 trillion. That's a significant response. But I think today, given the severity of the closures we're seeing across business activity, I'm more inclined to say at least 10%.

Again, that may seem like a lot. However, having studied financial crises and economic crises, the one common truth I've found is that when countries of any stripe face this sort of shock, the lesson is: Whatever you think you need to spend from a policy perspective, perhaps you need to spend a little more. And for no other reason than to overwhelm the issue; then you prevent the so-called second-order effects. In other words, if jobless rates increase, well down the line are potential delinquencies on loans and more agents, so you're trying to overwhelm the response and effectively fill the void from which the business sector has been forced to retrace.

So, 10% is a bold response. I think we'll see more boldness in Europe, which in the past has been reluctant to respond through fiscal policy. I think it's encouraging to see a serious conversation on this front, even with certain economic data not even showing the recession we anticipate.

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