Testing Monetary, Fiscal Policy As ‘This Time Is Different’

face mask and money

This time is different, as the saying goes.

It’s been repeated up and down Wall Street, for decades. Whenever a seismic event comes on the scene, and threatens to swamp the financial system and the U.S. (and global) economy, traders, bankers and economists claim:

This time it’s different.

That sentiment was echoed, at least in part, Wednesday (March 18) in an op-ed that ran in the Financial Times, penned by Ben Bernanke and Janet Yellen, former heads of the U.S. Federal Reserve.

With a nod to the recent actions announced by the Fed to combat the continued impact of the coronavirus, they wrote that parallels exist between today and 2008, at least in terms of response. But underneath it all, the challenges are different this time around:

“Back then, the near-collapse of the financial system froze credit and spending; the goal of monetary policy was to restart both,” Bernanke and Yellen wrote. “Now, the problem is not originating from financial markets: they are only reflecting underlying concerns about the potential damage caused by the coronavirus pandemic, which of course monetary policy cannot influence.”

In that statement lies an acknowledgement of at least some of the limits of monetary policy, where rates are now at near zero percent, and the Fed is stepping in to buy up more than $700 billion in Treasury debt and mortgage-backed securities.

The markets may show increased volatility as traders work from home, or as liquidity concerns mount due to high leverage. And speaking of leverage, the credit markets have to function as usual so that businesses can tap the funds that they do, and will, need to grapple with the coronavirus-led downturn.

And, in addition, “fiscal policy will certainly have to do more as the size of the hit to economic activity becomes apparent,” Bernanke and Yellen wrote. That assessment comes in the wake of news this week that the Trump administration, as The Wall Street Journal reported, is pitching Senate Republicans on a plan that is part of a $1 trillion stimulus package that would give direct payouts to individuals. The U.S. actions would come on the heels of monetary policy actions from counterparts in France and elsewhere, where stimulus packages are bringing tens of billions of euros into those respective economies. Bailouts seem to be on the way, too, as in the U.S., the airline industry is slated to get $50 billion in assistance from the Trump administration and as much as $500 billion will be earmarked for small business.

All of the fiscal and Fed firepower being trained to bear on the coronavirus cannot restore supply chains or give legs to a bull run that has gone on for 11 years.

At this writing, U.S. Treasury yields are jumping, as investors are racing to raise cash. The 10-year Treasury note yield is up nearly 11 basis points to 1.1 percent. When bonds and stocks sell off at the same time (the Dow is off more than 4 percent this morning), it can be a signal that investors have been less than stimulated by the stimulus.

Raising cash may give rise to hoarding cash. And if cash stays firmly in the respective pockets of consumers and businesses, the idea of stimulating the economy will be just an idea. On the other hand, a flurry of spending now — let’s say that happens, over eCommerce channels, as of course so many retailers and other businesses are shuttering brick-and-mortar locations — means less need to spend later on. It’s possible that leveraged Americans take the checks sent by the government and triage responsibilities such as rent or mortgage payments, or even credit card debt. The short-term stabilization that is so important may not materialize — and we may be about to find out whether this time is different, after all.



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