The Wall Street Journal
June 20, 2009
Global corporations have raised nearly $2 trillion in public and private markets this year, a clear sign the economy has begun to heal.
This process shouldn't surprise investors any more than it would surprise a critical-care doctor that the immune system plays a key role in restoring a patient's health. As the chairman of an economic think tank and a physician respectively, we see a remarkable alignment between treatment regimens for sick economies and sick people. In both cases, it's important at some point to let the patient's immune system carry the load of recovery. Overtreatment is bad medicine.
Before the 1970s, our economy's "immune system" resided in financial institutions, especially banks and insurance companies. Companies looked to these institutions for capital that could restore growth and create jobs whenever the economy got sick. Beginning with the 1974-75 recession, however, capital markets took over the healing function; equity and bond markets provided the "antibodies" that corporate America could depend on to fight off the infection of recession.
Economies that lack the crucial immune-system component of a corporate bond market tend to suffer longer, deeper recessions. The most obvious case in point is Japan, whose banks struggled to recapitalize in the 1990s.
The Treasury's recent stress tests have again highlighted the capital needs of financial institutions-and it is time to let them fill their needs in the capital markets. The fact that non-investment-grade companies (Harrah's Entertainment, Warner Music Group, MGM Mirage, Rite Aid and Ford Motor Credit) are now paying down bank debt with funds raised in those markets shows the capacity of our financial immune system to help the economic patient recover.
Other similarities between human and economic medicine are revealing. Grave illness is often more life-threatening when it follows years of bad habits-overeating, drinking to excess, failing to exercise, and abusing substances that create dependence. The recent economic boom reflected a similar lack of discipline-overindulging on credit, leveraging assets to excess, failing to maintain enough equity in the capital structure, and disregarding the consequences of dependence on foreign oil.
When doctors tell patients to adopt healthier habits following a heart attack, the patients have no one to blame but themselves if they fail to comply. And when markets tell companies it's time to deleverage following an economic downturn, the companies have no one to blame but themselves if they fail to change their balance sheets.
Consider someone rushed into an emergency room in severe cardiac distress. After starting acute life-support measures, doctors still apply the rule stated by Galen of Pergamum more than 1,800 years ago: primum non nocere, or "First, do no harm." Treatment interventions are selected carefully from a battery of technologies and potent drugs while recognizing that any one of them, or a combination, could hurt the patient if misapplied or given in the wrong dosage. Economic interventions require no less care.
The attending physician makes a preliminary diagnosis: patient in shock; condition critical; blood not flowing through the body (low cardiac output). Last fall, the Treasury and the Fed diagnosed their patient: in shock; condition critical; money not flowing through the economy.
Priority one is to stabilize the patient using the "A/B/C" mnemonic- Airway/Breathing/Circulation. If necessary, provide oxygen through a respirator and stabilize the heart rhythm. When markets went into freefall, "A/B/C" was AIG/Banks/Credit markets. "Oxygen" included the Commercial Paper Funding Facility and other Federal Reserve tools. The Troubled Asset Relief Program was one of several Treasury interventions designed to stabilize the economy's rhythm.
With the patient stabilized, additional measures may be started: cardiac-performance stimulus, blood transfusions and antibiotics. Economic measures include the stimulus package and industry-bailout transfusions. Anticoagulants are sometimes used to prevent clots and help the body's peripheral circulation. The "anticoagulants" of Fed liquidity expansion, increased loan guarantees for small business, and a tax credit for first-time home buyers help the economy's peripheral circulation.
The intensive-care attending physician coordinates other specialists and creates a treatment plan. The goal is to keep all systems-heart, lungs, kidneys, brain-in balance. The optimal blood-pressure stimulus, for example, could impair the kidneys, which filter out toxic material.
When the economy was moved into intensive care following the Lehman Brothers failure last September, government officials coordinated other specialists and created a treatment plan. The goal was to keep all systems-capital markets, banks, insurers, GSEs-in balance. The optimal intervention with only one policy lever could impair the process of filtering out toxic assets.
Before leaving the hospital, a patient often gets a stress test to assess health, determine the right medication, and plan rehabilitation. Following their stress test, major financial institutions have started rehabilitation by going to the capital markets.
Some of the analogies we've drawn are a stretch. But here's one that matches perfectly: When the body begins to recover, doctors gradually withdraw external support and make sure the patient doesn't become addicted to medication.
Our economic doctors should permit America's uniquely effective immune system to take over as companies and financial institutions deleverage their balance sheets. With people and with capitalism, the tincture of time is often the best medicine.
Mr. Milken is chairman of the Milken Institute. Dr. Simons is president of the Prostate Cancer Foundation.