'Central banks can't cure the virus,' former Fed governor Kroszner says, and lays out the next steps policymakers may take to respond to the virus
- Randall Kroszner, a former Federal Reserve governor, said central banks won't cure COVID-19.
- He told CNBC's Squawk Box: "They can't cure the virus, they can't unlock economies and they can't replace broken supply chains."
- He predicted a number of companies will default, prompting a return to the debt forgiveness levels last seen in the 1930s.
- He added that the Fed may pursue negative interest rates if they enter a "deflation situation."
As central banks around the world continue to roll out measures to keep their economies afloat during the pandemic, former central banker Randall Kroszner says that "central banks can't cure the virus."
Kroszner, who served as a Federal Reserve governor between 2006 and 2009, said in an interview on CNBC's Squawk Box published Monday: "There is only so much central banks can do. As a central banker I am never going to say central banks are not powerful but they can't cure the virus, they can't unlock economies and they can't replace broken supply chains."
The Fed has taken a number of unprecedented measures to shore up the economy during the pandemic.
They include pursuing a $2.3 trillion economic-stimulus program and reducing interest rates to almost zero.
"Central banks can provide a bridge to support a new equilibrium but it is going to be a while to get to the new equilibrium and it is not going to be easy," Kroszner said.
Return to 1930s debt forgiveness program
Kroszner said that the next phase of defeating the virus is likely to be increased infrastructure spending.
"There is an opportunity for infrastructure spending going forward and this is likely to be the next step in the responses in curing the virus both in the US and globally," he said.
He expects a number of companies to default, driving debt forgiveness to levels last seen during the Great Depression in the 1930s.
"You are going to see a significant rise in firms being unable to pay the debt," he said. "Even if some of those loans are forgiven, there is going to be a lot ot debt renegotiation, a lot of debt restructuring if you want to preserve many jobs and as many businesses as possible."
He added: "I think having an expedited approach to that will be valuable. Going back to the 1930s, we did do a lot of debt forgiveness and there is going to be a lot of discussion on across-the-board debt forgiveness."
Firms will be reluctant to invest in coming quarters and years, Kroszner continued.
This particularly holds in the energy sector, where oil prices crashed in March. Prices have recovered since, but still have a long way to go until they reach their levels before the pandemic struck and Russia and Saudi Arabia kicked off a price war in early March.
But he thinks the tech industry wil continue to make investments.
"This is very different from 9-11 which was an enormous shock to people. We got the airline industry working again, we got people back on to airlines, people felt safe to go out. That is very different from now where people are still very wary."
"Even if people are allowed to go out, they still may not consume," he added.
Negative rates remain a possibility
Kroszner also suggested the Fed could do little to spur a V-shaped recovery for the US economy, given its hesitation to cut interest rates below zero.
"I don't think there is that much the Fed can do to get a V-shaped recovery," he said. "The Fed really does not want to go negative, and they would really prefer not to."
"The balance sheet has exploded far beyond when I was there a decade ago, they are trying to make sure they don't get into that situation," he added.
Fed Chairman Jerome Powell so far has downplayed the prospect of negative rates, but analysts have noted that what the Fed does will ultimately depend on how the US recovers from its current economic crisis. If the economy springs back quickly, negative rates are unlikely, but if there is longer turmoil, they become more possible.
Kroszner said: "They are trying to avoid deflation, but if they get in a deflation situation they may have to reevaluate and consider negative interest rates."
The Fed's key rate currently sits at 0.25%, with the central bank announcing its next move on June 10.