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Former U.S. official: The coronavirus financial crisis has to be handled differently

Congress is expected to pass a stimulus package to counteract the economic havoc the coronavirus, or COVID-19, is unleashing on the U.S. economy.

And one former official warned against making the same mistakes made a decade ago.

During the Global Financial Crisis, “a lot of the money flowed to the banks … [and not] made available to Main Street businesses or to the people in the communities,” Richard Cordray, the first director of the Consumer Financial Protection Bureau (CFPB), told Yahoo Finance’s The Ticker. “There was a lot of resentment about that. It helped fuel the rise of the … polarized politics we’ve seen over the last decade.” 

Instead, the government should be “trying to get money in the hands of people directly,” said Cordray.

The $2 trillion stimulus package — the largest emergency aid package in U.S. history — seems to be doing that to an extent: The $2 trillion stimulus package provides one-time payments of $1,200 for individuals, or $2,400 for those who are married and file income taxes jointly. It also includes $500 per child. Some economists are calling for more sustained support as Americans lose jobs in record numbers.

“The main problem now is, people are stuck in their homes, and they can’t afford child care, and they can’t buy groceries, and their checks are going to stop,” Michael J. Graetz, a tax expert and law professor at Columbia University who served as a top Treasury Department official during the George H.W. Bush administration, told the Washington Post. “Many businesses will continue to pay for people for a short period of time, but they are not going to pay people for a longer period of time. They will just let people go.”

U.S. President George W. Bush and Ben S. Bernanke, chairman of the U.S. Federal Reserve, in the Rose Garden of the White House in Washington, D.C., U.S., on Friday, Sept. 19, 2008. (Photo: Dennis Brack/Bloomberg via Getty Images)

The work from home divide

And as the coronavirus outbreak continues and businesses across the country are shuttered in an effort to control the pandemic, millions of people are suddenly finding themselves unemployed or having to risk exposure to the virus to get paid.

“Economic inequality has grown to be at its worst … we’re now going to see a divide between people who can stay at home and work and maintain their full salary, and for them it’s just an inconvenience,” Cordray said. “But people who have to work face-to-face will be upended … they’re going to be hurt if this drags on for weeks or months. Many of them will end up not being able to restart again.”

New York City, the country's largest metropolitan area, has been hit hard by coronavirus. (Source: Yahoo Finance)

In the aftermath of the 2008 Financial Crisis, Massachusetts Senator Elizabeth Warren designed and launched the CFPB to protect Americans and their families against irresponsible lending and to strengthen consumer protection.

Cordray became the bureau’s first director, and recently released a book about his experience, called “Watchdog: How Protecting Consumers Can Save Our Families, Our Economy, and Our Democracy.” 

He noted that with the rapid escalation of the use of credit, and how central it has become to the U.S. economy, he expected many consumers with heavy loads of debt to file for bankruptcy and “into ruin that will be difficult for them to come out of.” 

As for the notion that the U.S. economy will bounce back once the new coronavirus is under control, Cordray advised caution.

“It’s easy to say just stop the economy, flip the switch… [and] turn it back on again,” he said. “That’s not the practical reality for most people.”

Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami

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