Former Fed Vice Chair Blinder says cutting government aid during the coronavirus pandemic would be a 'catastrophic mistake'

• Former Federal Reserve Vice Chairman Alan Blinder said Wednesday that cutting federal aid during the coronavirus pandemic would be a "catastrophic mistake." 
• The $600 per week federal unemployment insurance benefit — put in place due to the economic shutdown — is set to expire at the end of the month.
• "Its pretty hard to identify [zombie businesses] right now when doors are shuttered and people are afraid to go out," Blinder said on CNBC's "Squawk on the Street." 

Former Federal Reserve Vice Chairman Alan Blinder said Wednesday it is imperative that Congress continues to aid ailing Americans who were laid off during the Covid-19 pandemic. 

"Cutting the dollar flow in this emergency would be a catastrophic mistake," Blinder said on CNBC's "Squawk on the Street." 

The $600-per-week federal unemployment insurance benefit — put in place due to the coronavirus economic shutdown — is set to expire at the end of the month, and lawmakers are facing pressure to pass new legislation to extend the stimulus. 

"We can restructure it, instead of the $600 a week, we could raise the replacement rate, that is what fraction of your previous wage gets replaced by unemployment benefits, while maintaining the same number of dollars," Blinder added. "That would leave over enough money to pay some bonuses to people that go back to work. So don't cut the dollar flow but restructure it is the right thing to do."

Some investors — including "Shark Tank" investor Kevin O'Leary — say the government should not establish more relief programs for businesses affected by the coronavirus. O'Leary does not want the government to prop up so-called zombie companies that continue to exist even though their revenues don't exceed their debt payments. 

Blinder, who said he traditionally would agree to let capitalism play out, said the current economic circumstances are "strange beyond belief" and the aid should be extended. 

"The time for decisions like that will be when the economy starts crawling out a deep hole … and is somewhat on the path back to normalcy," he said. "Then we should let zombie firms go, but it's pretty hard to identify zombies right now when doors are shuttered and people are afraid to go out."

While Congress negotiates the aid package, the U.S. is struggling to contain a disease that has infected and killed more people nationwide than in any other country, according to data compiled by Johns Hopkins University. As the pandemic rages in Florida, Texas and other states, the country has now reported nearly 3.9 million Covid-19 cases and more than 142,000 deaths. 

Blinder said in Wall Street Journal article last week that a "double dip recession" is a possibility if the coronavirus isn't stamped out soon. 

"It's regional. On the first big wave of this horrible disease it was centered in the Northeast, especially where I live in New Jersey, New York and Connecticut. The second wave is centered in the Sun Belt and its just as virulent if not more virulent than the first wave," he said. 

"It's a lot of people, that's a lot of the U.S. [gross domestic product]," Blinder added. 

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