So far in this ‘everything bubble’-burst crisis, the Fed has:
- Cut interest rates from 1.25% to 0.15%.
- Launched over $700 billion in Quarantitative Easing (QE).
- Launched a $1.5 trillion repo program.
- Launched another $1 trillion repo program…. daily!
- Announced it will begin buying commercial paper (short-term corporate debt).
- Allowed primary dealers to start parking assets, including stocks, as collateral in exchange for short-term credit.
- Announced it will begin buying muni debt.
- Opened unlimited dollar-swap-lines to the world.
And the result of all this record amount of liquidity provision – almost $30 trillion of global wealth destruction (bonds and stocks)…
And not a glimpse of deleveraging/selling pressure reduce in stocks or bonds…
And every aspect of the credit markets – from short-term munis to long-term commercial mortgage-backeds – is completely frozen.
“It’s brutal. We have never seen such a big move in such a short amount of time… This is the quickest and most severe I have ever experienced, and I was around for 2008.“
Enter former Fed Chairs Ben Bernanke and Janet Yellen, who, as we detailed earlier this week, urged the Fed to begin buying corporate debt and stocks in an op-ed piece in the Financial Times this morning the two former Fed Chairs
The Fed could ask Congress for the authority to buy limited amounts of investment-grade corporate debt. Most central banks already have this power, and the European Central Bank and the Bank of England regularly use it. The Fed’s intervention could help restart that part of the corporate debt market, which is under significant stress. Such a programme would have to be carefully calibrated to minimise the credit risk taken by the Fed while still providing needed liquidity to an essential market.
Currently the Fed is forbidden from doing either as per the Federal Reserve Act. Put another way, congress would need to authorize the Fed to start buying these assets, and the two former Fed Chairs are providing the political cover to do this.
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Authored by Martin Hutchinson via TBWNS.com,
This column has contended for several years, based on empirical data observations from several countries, that low interest rates worldwide were killing productivity growth. A University of Chicago paper finally provides some academic back-up for this contention and suggests a mechanism through which it takes place. There are other mechanisms also, and I would suggest that the Ben Bernanke-inspired wild monetary experimentation from 2008 on has done more damage to the world economy than any other initiative in the history of mankind.
The paper,“Low interest rates, market power and productivity growth” by Ernest Liu, Atif Mian and Amir Sufi, examines the behavior of firms in a competitive marketplace as interests decline, and demonstrates that, although lower interest rates at first increase competitiveness through increased investment, they also increase the comparative advantage of large firms, thus after a time discouraging the smaller firms from investing and making the market less competitive. If low interest rates persist and approach zero, eventually even the larger firms stop investing, because they are no longer subject to significant competition and thus do not need to invest.
The paper provides theoretical backing to and a possible mechanism for the observation set out in this column on several occasions in the last few years: that ultra-low interest rates in Japan, the Eurozone, Britain and the United States were closely correlated with unprecedented declines in the rate of productivity growth in those countries. In all the high-income industrial countries where interest rates were held artificially low after 2008, productivity growth by 2016 had effectively disappeared altogether, or close to it. The worst effects were seen in the eurozone and in Britain, where inflation continued, making real interest rates sharply negative. Even in Japan, where interest rates have been held artificially low for two decades, the productivity dearth worsened substantially after 2009.
Only after President Donald Trump was inaugurated in the United States did U.S. productivity growth begin recovering towards its healthy historical levels. Undoubtedly part of this recovery was due to the Trump administration’s de-regulation policies – just ceasing to pile regulation upon regulation appears to have had some positive effect, especially in industries sensitive to environmental-regulatory harassment.
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