White House Watch: Structural Change Not Always Intentional

Huge disruptions, pandemics and wars, can cause fundamental changes down the line that were not anticipated and which were hard to recognise at the time. Which brings us to the Federal Reserve in this time of crisis. Wednesday afternoon Chairman Jerome Powell will be explaining to the world the policy statement that is released at 2 p.m. ET. A central bank is an exercise in restraint, an entity that can turn down the throttle just when elected leadership wants to rev things up. Apolitical and more than a little technocratic, the central bank acts as ballast in a storm, a counterforce to inflation under ordinary circumstances and the guiding light for the financial system.

Calmly and without regard to current economic fads, fringe theories and populist personalities at the top, the Fed is designed to tack against prevailing winds, execute the cliché of taking away the punchbowl when the party’s going strong. Occasionally there can be a little departure from the template, like now, when the Fed is manufacturing punchbowls like they were ventilators, filling them with liquidity and trying to keep the party going whatever the cost.

Numbers that seem attached to exotic or banana republic currencies with lots of zeros, from some crazy dream where nations can spend enough to buy each other, are now routine at this central bank. Nine programs designed to scatter mountains of money in almost every direction while collecting barge loads of assets never before considered eligible to be in the Fed’s vaults add up to – no one really knows, but maybe $11 trillion. That’s about half as big as the American economy used to be before it was nearly paralysed by a sub-microscopic and highly evolved collection of proteins and ribonucleic acid, whatever that is.

As the Fed’s coffers are swollen with Treasury securities, mortgage backed securities and municipal bonds it’s getting ready for an expansion of its lending programs by another $2 trillion to $4 trillion. Chair Powell is all in as his Fed steps in to ward off a lot of bankruptcies and “meet the tests we are presented.” For the first time he has a partner who provides some cover from inevitable criticism, the Treasury Department.

Dodd-Frank reform legislation was intended to place new boundaries around Fed powers, making emergency lending contingent on Treasury approval. Some economists used to worry that the Fed was enabling the government’s financing arm, neutralising any damage from too much borrowing and even – always denied – keeping interest rates low so deficits did not bite as much.

“Enabling” is no longer adequate. Now the Fed infuses and amplifies and transforms government’s capacity to borrow into a credit mechanism so large and overwhelming its scope can hardly be grasped by mortal men. Yet, viewed through the eye of history despite the lack of precedent, such an enormous role for a cadre of technocrats must surely change the underpinnings of the economy, of relations with other currencies, of the bindings with credit markets. Can the Fed someday merely unwind all its gargantuan lending programmes and restore everything to the way it was?

One way to look at the current circumstance is to realise that although the Fed can be said to control all aspects of a frozen economy, it is at the mercy of developments that it can’t control. Elected representatives of the people, the president and governors, are making medical decisions that many medical experts argue are not in the best interest of their constituents.

President Trump Tuesday afternoon riffed on about bringing students back to their classrooms soon. “Now, we found out that young people do extraordinarily well,” he said at a photo-op with business people from tiny enterprises who benefited from the Paycheck Protection Program. “That’s why I think we can start thinking about schools,” he repeated from a theme he debuted Monday afternoon. “But of course, we’re ending the school season.  So, you know, it wouldn’t be – probably, you’d be back – you wouldn’t be back for too long.”
You can almost hear the chorus of medical experts complete the thought; just long enough to infect each other, carry the infection home and be the vectors of a disease everyone is supposed to be fighting.

Meanwhile some governors are taking their cue from the president, later withdrawn, to push the re-openings of personal service businesses that are unavoidably conduits of disease transmission, from beauty parlours, nail salons to massage parlours and gyms.

The biggest hazard the Fed faces, it could be argued, is the second wave of Covid-19, that could cripple a recovering economy, turn temporary credit facilities into a semi-permanent governmental lifeline of capitalism.

Second waves are characteristic of pandemics. The 1918 Spanish flu that killed up to 50 million people wasn’t from Spain. It was carried into Europe from a Kansas army base by American soldiers who in the beginning only suffered from a bad case of influenza. It mutated and came back with a vengeance. Only Spain’s journalists were not under war-time censorship and so alone could write about the raging disease’s second much more vicious killing wave.

A second wave hitting a US economy already enfeebled by the first wave could set the Fed’s cosmic expansion into concrete. It could well change the relationship of Wall Street to Main Street to the credit markets and to Washington in ways hard to imagine.

With all that at stake, the Fed’s low-key band of pragmatists does not have a seat at the medical policy table. The policymakers and their infrastructure of PhD economists are not weighing science and experimental outcomes, theory and precedent to vote on whether to reopen schools for a few weeks in May and June. Nor are they voting on whether it’s a great idea to have personal service businesses reopening while the daily death tolls in those states in some cases are still escalating.

Maybe Congress could make that modest alteration, outsource those kinds of decisions to the Fed and create a special Federal Medical Policy Committee along the lines of the Federal Open Market Committee. It would be a temporary arrangement, of course, bypassing the executive branches of state and national government, only until the pandemic fades – if it does.

And who better to do it than an entity with double-digit trillions at stake?



Colin Lambert

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