This week, the Federal Reserve announced that it would inject as much as $1.5 trillion into the short-term money markets, an intervention designed to ease the pressure on the financial system and lower the chances of a financial crisis.
This action received a lot of criticism from the left. The progressive standard-bearer Alexandria Ocasio-Cortez argued that “the amount that the Fed just injected almost covers all student loan debt in the U.S.,” and that “we need to care for working people as much as we care for the stock market.” Senator Bernie Sanders said, “When we say it’s time to provide health care to all our people, we’re told we can’t afford it. But if the stock market is in trouble, no problem! The government can just hand out $1.5 trillion to calm bankers.” Others described the injection as a gigantic subsidy for Wall Street.
The progressive frustration was understandable: The Fed is a technocratic institution that has offered immediate resources to aid the markets. Yes, that makes bankers better off. No, that does not feel fair, not given the administration’s flailing, too-little, too-late response to the viral pandemic, something that is costing lives and livelihoods already. Broker-dealers get instant help; families get to wait for a meager expansion to food stamps.
Still, the online commentary was inaccurate both about what the Fed was doing and about why it was doing it. And there is a good progressive case for the Fed doing as much as it can to help the financial markets—and for Congress doing even more to help regular people.
A few technical points: The Fed did not spend $1.5 trillion. This was not a $1.5 trillion bailout. It did not cost Americans $1.5 trillion. It was not a $1.5 trillion subsidy for hedge funds and the like. It did not use up $1.5 trillion in resources that could have gone to another cause, whether Wall Street bailouts or Medicare for All.
The Fed works in weird ways, but here goes: The central bank announced that it would offer financial firms up to $1.5 trillion in short-term, collateralized loans. A firm can borrow $100 in cash overnight, for example, but only if it gives the Fed $100 in Treasury securities backed by the full faith and credit of the American government, and pays a small amount of interest too. Doing this costs the Fed nothing, and costs the American taxpayer nothing; when all is said and done, the central bank will probably make a small amount of money off the interest payments.
The Fed chose to do this not as a payoff for Wall Street or to calm the stock market. (It has nothing to do with the stock market at all, though equities crashing is in part a sign of the very financial strain the Fed is attempting to soothe.) It did it to help make sure that the market for Treasury bonds continues to function normally. It was not using taxpayer dollars to juice a money-losing industry, but instead acting as an emergency backstop for the markets writ large.
Signs indicate that it needs to do more, not less, in the coming days: The markets continue to act in strained and strange and erratic ways. Investment banks expect the central bank to drop interest rates to zero soon, and to begin purchasing huge sums of assets, something called “quantitative easing.” There is some chance, as well, that the Fed might end up setting up special facilities to supply liquidity to the financial system, as it did during the 2008 debacle.
There’s a lot for average folks to like about what the Fed is doing, as much as it might seem arcane or technocratic or unfair. For one, recessions complicated by financial crises are much, much harder to fight, and much, much worse than plain-vanilla downturns: If the Fed and other central banks keep the markets functioning, that benefits everybody. But a credit crunch would hurt everybody. Businesses are already seeing revenue evaporate. Many will seek loans to help tide them over. Low interest rates and liquid markets will help those businesses, the families that rely on them for work, and the communities they serve.
That said, there’s a lot not to like too. Morgan Ricks, a law professor at Vanderbilt University and an expert on financial regulation, questions why markets needed this kind of emergency oxygen now, and whether the Fed should be doing more to make markets work, even in times of crisis, without the government’s help. The Fed’s repo transactions may not cost anything, but the Fed is still propping up the financial sector.
More broadly, one could argue that the extraordinary measures the Fed has taken in the past and is taking today contribute to the country’s inequality. There’s a deep, intuitive unfairness to monetary policy going to the mattresses when fiscal policy has not even gotten out of bed: The Fed is helping rich financiers, while poor families are unsure whether aid is coming.
But the economy needs both monetary policy and fiscal policy. The trillion-dollar repo facility did not create some kind of either-or scenario, with aid to hedge funds and financiers crowding out aid to student-loan borrowers and gig workers. And the real fault here—both during the Great Recession and now—lies not with the Fed, but with Congress, particularly Republicans in Congress.
Democrats, acting with panicked muscle memory from the miserable exercises of the previous crisis, have proposed very aggressive fiscal policy, up to and including sending large monthly checks to every American household. A proposed rescue plan includes expanded unemployment insurance, paid sick leave, and more money for the Supplemental Nutrition Assistance Program. Republicans, still dismissing the severity of the pandemic, have suggested wan policies and slowed down the process. That means monetary policy is acting on its own. That means more joblessness and a sharper slowdown. That means lower-income families reliant on temporary work have no chance of recovering as fast as high-income families reliant on dividends and market returns.
Why couldn’t the Fed get creative and get into the fiscal-policy game? Why couldn’t it create $1.5 trillion and shower it on Americans? No less an authority than Ben Bernanke, the Fed chair who helped the country muddle through the Great Recession, has considered that scenario. It is possible, and at some point might become necessary. But it is not an option open to the Fed at the moment, since it would likely require a new legal framework and definitely require a lot of new policy infrastructure. (In one scheme, every American would incorporate as a kind of bank, then seek zero-interest loans. It would be weird.) Fed intervention in fiscal policy would also require, I imagine, Congress flat-out refusing to do its job and letting a downturn become a severe recession.
Let’s hope that does not happen. For now, the Fed is doing what it can to act as an emergency salve for the financial system. It is not preventing any kind of radical, progressive stimulus to help regular Americans, and is in fact signaling that there needs to be direct aid for regular people. America needs helicopter cash. It is up to legislators to shower it on them.