If this sounds a little Zimbabwean, that’s because it is. Having a central bank help the government spend by magic-wanding cash into existence has long been considered an economic-policy taboo, a dangerous last resort for failing states. But no less an authority than Ben Bernanke has argued that it might be a government’s best option “under certain extreme circumstances.” Now many mainstream economists and Wall Street financiers are arguing that those extreme circumstances have arrived. “The risk here is metastasis into another Great Depression,” says Diane Swonk, the chief economist at Grant Thornton, an accounting and advisory firm. “It’s like a meteor hit the Earth off its axis. The Fed can’t get us back on the axis, but they’re the gravity to keep us rooted.”
The Fed has a number of traditional tools available to make sure the markets are feeling strong doses of gravity. It can make borrowing cheaper for households, nudge businesses to take on risk, set up loan programs, and keep markets liquid. It “can buy things or lend things in certain conditions,” says Joseph E. Gagnon, a former Fed official now at the Peterson Institute for International Economics. But, he said, it “can’t just give money out.”
In circumstances like these, the Fed’s inability to do that is something of a problem. Lower interest rates are not going to prevent deflation during an economic freeze, and bond-buying is not going to help families whose income has been cut in half. The Fed’s tools, moreover, tend to affect Wall Street more than Main Street, and have the potential to stoke inequality, when it is lower-income families who are suffering the most right now.
Derek Thompson: The coronavirus will be a catastrophe for the poor
The boldest option would be for Congress to authorize the central bank to abandon tradition and start sending checks or direct-deposit payments to households. For years, academics and some members of Congress have pushed for the Fed to create digital-dollar accounts. With a keystroke, the Fed could make money appear in people’s accounts, whether financed by its own money printer or by Treasury funds. I asked Gagnon if he thought the Fed would be doing that if it had the option. “Oh, there’s no doubt,” he said.
The central bank could also make new money available for Congress to spend, and commit to not offsetting that stimulus by raising interest rates. In fact, the Fed is arguably doing that already through its open-ended bond-buying. “The Fed has basically green-lit as much fiscal policy” as Congress passes, Timothy Duy, an economist at the University of Oregon, told me. “Do we effectively have some kind of monetary-fiscal coordination going on? It seems fairly clear there’s an implicit agreement on the part of the Fed that they’ll absorb any [debt] Treasury issues without question, as long as the economy needs it.”