Well it's been about 7 years since I last blogged. Is it because the Blog is Dead? Whatever. No matter. Today I share my thoughts on an interesting discussion I heard between Frederic Mishkin, Patrician Mosser and emceed by Kate Davidson (WSJ). The first two are NY Federal Reservists. Google them and be impressed. They've got serious cred.
The topic at hand was discussing how the Federal Reserve and Congress have reacted to economic issues related to COVID-19. Here are a few takeaways, at least the ones I understood and hopefully copied down well enough:
(Note: I am NOT an economist, PhD or super-smarty so grains of salt required.)
The Fed acted Fast. The CARES Act came out to the tune of $2T (yes Trillion) in 1 week after the official "It's a Pandemic" announcement of 3/11/20.
But, how could this happen so quickly? I can barely get this little blog out in an four hours.
Well, it turns out that the Financial Crisis in 2007 was a test run and most of the tools, credit facilities, smarty-pants ideas, etc., were just re-dos from the 2007 Plans. (Remember TARP, Troubled Asset Relief Program?) More specifically, this time the Large Asset purchases were made in conjunction with the Federal Reserve and joint efforts with the Treasury (and we should talk a little about that partnership).
The Large Asset purchases were so vastly expanded that in mere days (not months like in 2007/8) it was a larger commitment than all of QE1 + QE2 combined. BTW, QE = Quantitative Easing. Ben Bernanke wants to rename it "CE" = Credit Easing since the entire point of buying up questionable assets is to shore up balance sheets and increase the ability of financial institutions to offer credit to customers; they are restricted by the value of the assets they have via daily and tested ratios. If the assets they hold are junk-y (low value) then they have less to leverage. Make the junk go-away to someone else's balance sheet or give it a better credit report card because they (US Government) now backs it (even if it still is junk-y) and that helps the ratios. As well, the US government does a little fancy bookwork in their ledgers and just magically gives the transacted financial institution some money (resulting in increased credit for loans). Boy, any economist or Fed Reservist is eye-rolling big time right now with my explanation but I told you at the top, I'm not expert. Somehow though, we regular-ish folks have to understand what the heck they're doing, while they spend so much money that we have to pay back. This is my shot at it.
So, back to the explanation.
Congress passed the $2T CARES ACT.
The Fed Balance Sheet ballooned from $4T to $7T. Turns out $2.5T of that was Asset purchases...
But guess what? Of all of the "Indirectly Lending to non-financial sector" programs (for regular people, small and medium-sized businesses) that the CARES Act declared on March 15, 2020, only 2, yes TWO programs are up and running (as of this writing July 1, 2020 or 3.5 months after announced). The Fed Reservists said that the mere announcements of the programs' existence is what matters greatly. That's why the bond and stock markets are up amid such uncertainty. Boy oh boy. Something rings funky in my ears about that with each passing day. Businesses that truly have little to no reserves to tap into while Sales and Revenues are small fractions of pre-COVID days. I sure hope the banks can figure out the Loan processes f-a-s-t and get the funds downstream where they need to go.
Here's another goodie: The Fed announced in March they'd buy Municipal Bonds, ostensibly shoring up any lack of confidence in that area. Note: no or lower local revenues means less tax money for municipalities, means iffy payments for outstanding bonds, means nervousness for anyone who can think ahead, means lower prices for bonds. Funny enough though, the Fed started buying munis just 2 weeks ago, another 3.5 month delay but this time for a different reason. The Fed was ready to buy but the private market (regular people) filled the gap and snapped up munis as prices fell for bonds (rates go up--clasic see-saw of value:rates). Private people like higher rates. Once the appetite for private buying slowed, the Fed stepped in and continued purchasing bonds but months went by between announcement and action on the Fed's part.
Oh what about this? I've been recently whining and finger-wagging about "Moral Hazard" and "Here we go again!" snorts. Well, the smarties on the call pointed out that the markets falling was not the MBAs fault this time. It was an "Act of God" as they say. COVID-19 stopped the economy and made everyone go home. So, this is a proper time to intervene and buffer the economy or any ill effect it would have on its citizens because like a war, it is short-term. There will be an end to COVID (hopefully). So, run up the debt and we'll pay it off later when the economy rebounds. This is meant to provide classic bridge financing for a little while. The shock to the economic system from the health crisis is only as good as the healthy policy results. If there is no health compliance, COVID continues to ravage destruction on the economy (and us) then there is no economic policy that will fix us. (Hints: masks, testing,+++)
So, this blog piece is titled "Inflation or Deflation?" I may be the last person left on earth to learn this difference but in case I'm not, here goes. I researched (for nerdy fun) years ago after the 2007 Financial Crisis, what was to happen next? And in all of my non-academic research (read: late night Google searches) I found "Inflation!" as the historical answer. I walked around for the next 13 years expecting it. To this day that answer was wrong and I've never understood why. I kept waiting for the interest rates to shoot up and bonds to go down and the prices of food to shoot up and cars and, and, and. Nada. Zip. Zilch. In fact, negative interest rates and nominal inflation. Alright, housing prices in California went up but they always do that, at least for most of my life. So watch this one:
*When there is a Supply Shock (not enough supply of whatever) it pushes prices up (inflation).
*When there is a Demand Shock (not enough demand for whatever) it pushes prices down (deflation).
*During the Pandemic, we have both.
--We've been hearing of the supply chains being disrupted during the pandemic so there is less on the shelves or, or, or. (supply shock)
--We've had less demand for things and services either because we're afraid of the germs or because we just don't have the discretionary income to buy or, or, or. (demand shock)
It remains to be seen what the Fed can do about either of the above if COVID continues unabated.
What is clear though is that if inflation is the outcome, that is all bad. So many other countries use the dollar (and our interest rate) for Loans or to back their currency. If our interest rate climbs, theirs does too. Their Loans increase when pegged to us and the whole shebang has big trouble. If the countries that have those Loans have nowhere else to get further Loans or get the Loans restructured or find other sources of Income (which may have been why they got the loans in the first place) it all tumbles.
Final thought, and boy these seem random but they were really great and somewhat orderly in the discussion I heard. I'm just writing tidbits here. Hope it's readable for you.
The Fed and the Treasury are in bed together and this is not a first but perhaps not ideal. In 1951 they were separated after World War II when the Fed was subservient to the Treasury. (Think Bonds issued at rates pegged so that more bonds could be sold to make tanks and beat Hitler.) It took the "Accord of 1951 between the Federal Reserve and the Treasury Department" to clean up that compromised situation. Having a Treasury that is telling the Fed how much risk to take is not really their job. Risk should be calculated by the Federal Reserve.
Hmmm. Now what? Well, wear a mask. (Did I already mention that? Oh, and wash your hands.) Read and learn. Write your congress representatives when things feel wrong to you. Vote. Help your neighbors and friends.
TTYL!
