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Get ready for the $4.5tn takeover

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Via Financial Times

One of the most moving responses to coronavirus has come from home-quarantined Italians singing together from their balconies. They were belting out Il Canto della Verbena or Volare. The subtext was that interdependence is the only defence humans have against their own fragility. For postwar individualist philosophers like Ayn Rand — cheerleader for the primacy of private capital — the jig is well and truly up.

Witness the extraordinary efforts by governments to stabilise their economies and forestall the collapse of business. The US signed off on a $2tn aid package in the early hours of Wednesday morning and the global bailout — central bank liquidity support included — will have a sticker price of more than $4.5tn.

That is a big number, even by the standards of recommended takeovers. And have no doubt that this is a takeover. Bringing in the state to help fend off the virus resembles a tactic in which target companies recruit “white knight” bidders to frustrate hostile bids by asset strippers. It is an ironic term for a least worst option.

Swaths of businesses are in the same needy place today. Whole sectors — notably airlines, hotels and cruise lines — will lack a raison d’être for months. For many companies, revenues will fall short of overheads. But state support, and the quid pro quos that go with it, are preferable to going bust.

“This is analogous to a war we have to mobilise to deal with,” says Jesse Fried, an economist and Harvard law professor. “It is not part of the normal boom and bust cycle.”

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The UK is ahead of the US on per capita infection levels. Britain therefore provides transatlantic pointers on how coronavirus can extend the frontiers of the state. Recently, the government has promised loans and grants to business worth £330bn, and basic pay for company employees who are left workless. In an echo of the wartime command economy, ministers are co-ordinating supermarkets to distribute food and manufacturers to make ventilators.

“If the government said it was nationalising all the UK’s shoe shops, people would regard it as entirely plausible,” jokes Howard Davies, chairman of Royal Bank of Scotland.

For diehard free marketeers, the only mercy is that Mr Johnson is a conflicted dirigiste. Conservatives are qualified for interventionism because they generally pursue it from necessity, not choice. The irony of Tories enacting the agendas of the Labour opposition is weaker than pundits pretend.

But the government will need to go further, not least in softening loan terms. Travel businesses like airlines need bailouts. If the state also takes equity stakes, it will wind up with a share portfolio again. All this after 40 years of privatisations interrupted only by a brief detour into bank bailouts.

Such expedient interventions will create legacies that will take years to unwind. “The danger is that free market economies end up resembling Soviet tractor collectives,” warns Simon French, chief economist of broker Panmure Gordon. In time, loans must be recouped or written off, and equity stakes sold.

Just about everything economic libertarians disapprove of is happening all at once. “If your house is burning, you have to put up with fire fighters flooding it with water,” sighs Matt Kilcoyne of the libertarian Adam Smith Institute.

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Sadly for Mr Kilcoyne, the works of libertarian philosophers like Ayn Rand are among the chattels going up in smoke. Traumatised by the evils of communism, this Russian émigré coined an equally ruthless materialist philosophy. It glorified entrepreneurs rather than workers and elevated financial relationships not community ties. It fed into the nineties neoliberal view of globalising corporations as a parallel power base to nation states.

The 9/11 terrorist attacks in 2001 and the financial crisis in 2008 damaged the ideology. The emergence of tech giants has kept it alive in the US, a more individualist society. But coronavirus is dispelling any doubts that ultimately the state, not business, is in charge. It can create money or pencil in future tax increases. Businesses cannot.

What they can do right now is help. Imminent bankruptcy precludes this for many. But plenty of businesses are solvent and able to show they are part of society more meaningfully than by printing a pretty brochure once a year.

French luxury group LVMH is making hand sanitiser. UK grocer Morrisons has set up a call centre for seniors who cannot order food online. Amazon will reportedly distribute Covid-19 test kits.

Duty aside, it makes business sense to accrue goodwill now. It may be needed in coming years, when every buyback and executive payout will face a tough public sniff test. Businesses in developed, democratic nations especially need to emerge well from coronavirus to maintain their competitive advantages.

Lucy Neville-Rolfe, a Conservative peer and City grandee, puts it like this: “When plague broke out in ancient Athens, it enabled Sparta, which was more disciplined, to become dominant.” No prizes for guessing, as China seeks to emerge from its own coronavirus lockdown, who might be Sparta this time.

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jonathan.guthrie@ft.com

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