Beltway libertarian economists are today hailing the Fed’s efforts to cure the economic crisis or are even suggesting they intervene to a greater extent to quell fears in markets. That is like saying we need to spread the coronavirus to more people to stop the pandemic.
The Fed created the economic crisis with its more than a decade–long campaign of ultralow interest rates and quantitative easing policy that injected massive liquidity into financial markets. This unprecedented monetary policy caused companies to become more leveraged and to embark upon capital spending programs on a massive scale.
This made an economic crisis inevitable. The coronavirus is simply the match that lit the fuse. It’s just a trigger of the crisis. Just before the event, the stock market was at all-time highs and unemployment was at all-time lows. Things were literally too good to be true!
Then the Fed announced an emergency rate cut on March 3, and it is widely expected to reduce its rate to zero in the near future. Most people, even economists, were left shaking their heads. Why cut rates when the economy is doing so great? How can rate cuts do anything about a medical problem or a supply chain disruption?
The truth is that “monetary policy,” that is, inflation, cannot solve such problems. The truth is that the Fed is trying to doctor the stock and bond markets. So far it has not worked and could even be said to be backfiring.
It is the Fed money supply inflation and ultralow interest rates that caused the inevitable crisis in the first place. It also has helped enable trillion-dollar deficits and an exploding national debt. It has encouraged companies to issue more bonds, and a big chunk of marginal investment grade bonds (BBB) will soon be headed for junk bond status. It has also encouraged individual investors not to save or invest in safe assets and to put their money into riskier stocks because they cannot earn interest from banks or dividends from safe companies. Any economist should see all these effects as bad for the economy.
The Fed is the cause of the crisis, not the cure.
