March 2020: How the Fed Averted Economic Disaster

The Saturday Essay
As markets plunged, Jerome Powell and his colleagues vastly expanded the reach of the central bank, with implications that will be felt for years to come

 Over the week of March 16, markets experienced an enormous shock to what investors refer to as liquidity, a catchall term for the cost of quickly converting an asset into cash.

Powell led his colleagues to slash interest rates to zero at a second emergency meeting in as many weeks. They were offering nearly unlimited cheap debt to keep the wheels of finance turning, and when that didn’t help, the Fed began purchasing massive quantities of government debt outright.

But none of the Fed’s actions were having their intended effect. Investors dumped whatever they could, including ostensibly “risk-free” U.S. Treasury securities.

The Dow tumbled as Mr. Ackman spoke, dropping as much as 2,000 points and triggering a marketwide 15-minute trading halt shortly before 1 p.m., one of several that month. By week’s end, the Dow had plunged more than 10,000 points 

Mr. Powell later defended his decision to purchase ETFs that had invested in junk debt. 

Because the pandemic shock was akin to a natural disaster, it allowed Mr. Powell and the Fed to sidestep concerns about moral hazard

Mr. Powell said last month. “Was it too much? I’m going to leave that to the historians.”

—This essay is adapted from Mr. Timiraos’s new book, “Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic—and Prevented Economic Disaster,” which will be published by Little, Brown on March 1. He is a reporter at The Wall Street Journal.

Nick Timiraos WSJ 18 February 2022

https://www.wsj.com/articles/march-2020-how-the-fed-averted-economic-disaster-11645199788

 

Time again to think about Moral Hazard 

https://englundmacro.blogspot.com/2021/05/time-again-to-think-about-moral-hazard.html