The Federal Reserves Response to the COVID Lockdowns
The COVID lockdowns of 2020 shuttered the economy overnight. The Federal Reserve was forced to act to prevent widespread damage. This paper looks at the interventions the central bank applied as well as at the upside and downside of these actions.
The first thing the Federal Reserve did was to ease credit by cutting interest rates to near zerowhich means there was no virtually no cost to borrow. The point of this was to encourage borrowing and spending so that the recession resulting from the lockdowns would not deepen to something akin to a depression. The Federal Reserve also had to take care of credit market and thus gave out short-term loans to major banks so that there were no disruptions. It made sure that businesses had access to short-term credit to keep operations going. It extended credit to small businesses that were adversely affected by the lockdowns. It also supported banks in the Paycheck Protection Program, giving forgivable loans to small businesses (essentially free money to businesses who wanted to keep employees on payroll during the lockdowns).
The Federal Reserve also had to supply liquidity by buying Treasuries and mortgage-backed securities in a continuation of its policy of quantitative easing (QE), which it launched in reaction to the 2008 Great Financial Crisis. Buy buying Treasuries it sought to lower long-term rates, bring stability to the markets (which went into freefall in 2020), and promote lending and investment. To that end, the central bank also issued forward guidance, indicating that rates would remain near zero for some time. This was meant...
Used car prices went up. Eventually, though, prices of everything went up as inflation finally was felt across the board. It was also cheaper for businesses to borrow. There was a V-shaped recovery in the
stock market, once...
…would have been like a car running into a brick wall. It cannot just be shut down like that without participants receiving some kind of support. The problem is that the support must be paid forit is not free no matter what it may seem like at the time. Modern Monetary Theory is often used to justify such large scale interventionsbut the obvious consequence is just as
Milton Friedman always said: too much money too fast pumped into markets will cause inflation. The economy today will only begin to grow on its own once more when private capital investments pick up.
Government intervention is merely a play-now-pay-later scheme. The
debt will eventually become too large for a nation to handle. The question for some is whether this point has already been reached. Is stagflation here to stay? What will help restore life to markets? One possible answer is exactly what Trump and Musk are doing with the Department of Government Efficiency: rooting out waste and restoring confidence in the governments ability to be transparent, accountable, and…
