The Fed and the Coronavirus Crisis

BY GERALD EPSTEIN | March/April 2020

This article is from Dollars & Sense: Real World Economics, available at

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This article is from the March/April 2020 issue.

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For the second time in roughly 10 years, the Federal Reserve and other central banks around the globe are being asked by bankers and politicians to save them and also save the economy—in that order. When the financial system was taken down in 2007–2008 by the outrageously reckless and corrupt behavior of regulator-enabled banks, the Fed, in partnership with the Treasury Department, committed, by some estimates, as much as $29 trillion to bail out the U.S. financial system. Other central banks took similar measures.

Now, the challenge facing the Fed and other central banks is likely to be even greater. This view might seem incorrect based on the claims of many commentators that the banks are stronger now than they were in the lead-up to the Great Financial Crisis of 2007–2008: they have less debt, have more capital buffers to stand between it and a taxpayer bailout, and have more ready cash (liquidity) to stem panic driven runs. All of this is true.

But the problems facing the Fed come not just from banks, but also from the massive financial system outside of the banks: hedge funds, asset managers, corporate bond markets, and a shadow banking system that are barely regulated by the Fed or other financial regulators, even though they are integrally—and now dangerously—interdependent with the banks. According to the Financial Stability Board, this global shadow finance system has been growing twice as fast as global bank assets from 2012 to 2017. And even though this time around the source of the crisis is not the financial system, finance has become a massive crisis accelerator because it has gotten so large and has been allowed to become so speculative and vulnerable, while remaining at the center of our highly financialized capitalist system.

Meanwhile, the global economy is collapsing around us, even more so than during the last financial crisis. The Fed and other central banks are thus faced with a double dilemma. They hold the keys to monetary policy which, as one of the two tools of macro- economic policy (along with fiscal policy), is tasked with maintaining high employment and stable prices—a tall order in the midst of this collapse of production, incomes, and employment. And at the same time, the Fed has to contend with preventing a meltdown of the financial system, which would make the underlying problem much, much worse. This is like being a parent and having one child who is terribly sick and needs care, while having a second child who is threatening to burn down the house unless he gets a huge treat. Can you deal with both? In what order?

During the Great Financial Crisis, the Fed made its choice. It bailed out the ornery kid and did very little for the rest of us. This time around, we are still waiting to see how the Fed will respond. In recent weeks, the Federal Reserve has undertaken a series of extraordinary measures (see Deutsche Bank Research, “COVID-19: List of Monetary and Fiscal Policy Responses by G20 Economies,” March 30, 2020, for a very useful list). First, the Fed lowered their interest rates to practically zero and then restarted quantitative easing to buy government securities and mortgage bonds. Then they restarted the multiple facilities providing liquidity and implicitly guaranteeing the operation of multiple financial operations: these markets include the commercial paper market, money market mutual funds, mortgage-backed securities and others, all of which have come under stress. Among the biggest operations is in the so-called “repo” (repurchase agreement) market, which is the major way the shadow banking system (and banks) borrow and lend to each other over the short term. In fact, this market has been having trouble since September, long before the coronavirus crisis, but now it is under even more stress. According to Deutsche Bank Research, the Fed could end up lending as much as $5 trillion in this market.

In addition, there are new problems in the markets. Major corporations have been going on a borrowing spree in recent years, as global interest rates have remained low and corporations have been wanting to finance large payouts to their executives and stockholders. This corporate bond market is huge, $7 trillion or more, and is now in serious trouble as the profits of major corporations tank. The Fed has created two facilities to help provide liquidity to this market. In addition, in recent years investment banks have been engaging in securitizing and trading assets other than the famous sub-prime mortgages they got in trouble with 10 years ago: these include student loans and car loans. The Fed has now had to create a new facility for each of these.

But what about the states, localities, cities, and small businesses that are under enormous stress and need help to keep going and provide needed services? Last time around the Fed did little to help them. Now, the government has tasked the Fed with acting more like a public bank and an arm of the Treasury in order to funnel funds to these entities and markets. The Fed is developing facilities to give loan guarantees and credits to many of these. In addition, the Federal Reserve is expected to create a facility to give loans and loan guarantees to small businesses. In the $2.2 trillion rescue package passed by Congress and signed into law, the government, through the Treasury Department, is injecting an additional $454 billion dollars of capital into the Federal Reserve that can be leveraged up to as much as $4.5 trillion in lending to try to help Main Street, not just Wall Street.

Turning the Fed into a proper public financial system in the middle of a national crisis is, in fact, a good idea. That is what Franklin D. Roosevelt did during World War II. Still, major questions of accountability and transparency abound here. During the Great Financial Crisis, the Fed and the Treasury lent billions and even trillions of dollars with very little oversight. Senator Elizabeth Warren has called for much stricter oversight this time around. But how will this really occur? The Fed is a creature of Congress, and so the Congress must exercise this oversight in the name of the public.

A big and unasked question, though, is: Why does the Fed have to bail out these massive financial markets yet again? How were these financial institutions and markets allowed to grow so massively over the last 10 years, with so little oversight? This time, wouldn’t it be better to create substitute, public institutions and bring these wild financial markets under control? A few possible steps the U.S. government could take include: nationalizing a bank or two and turning them into public utilities to support workers, families, and small business (as Doug Henwood has suggested recently); creating a postal banking system and supporting Credit Unions to provide small loans to households and small businesses; and directing a tightly accountable Federal Reserve to provide the liquidity and credit that we need to the “real economy” and to also provide dollar credit to underwrite international support for poor countries to help them survive the pandemic, while strictly limiting support to the massive global speculative financial system.

If we don’t take these critical steps, we will just keep underwriting the bloated and unproductive global financial system—helping it to lurch, prosper, and crash, from crisis to crisis.

is a professor of economics and co-director at the Political Economy Research Institute (PERI), UMass–Amherst.

L. Randall Wray, “$29 trillion: A Detailed Look at the Fed’s Bailout of the Financial System,” Levy Economics Institute, December 2011 (; Financial Stability Board, Global Monitoring Report on Non-Bank Financial Intermediation, January, 2020; Deutsche Bank Research, “Covid-19: List of Monetary and Fiscal Policy Responses by G20 Economies,” March 30, 2020; Doug Henwood, “A Few Ambitious Points on Fighting the Crisis,” LBO News, March 20, 2020 (

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