On Wednesday, President Trump arranged some bankers around the conference table in the cabinet room of the White House, where they told him they would continue to lend to consumers and small businesses. “We’re here to help,” said Brian Moynihan of Bank of America. “We are here to help,” said Michael Corbat of Citigroup. “We are all here to help,” said Charlie Scharf of Wells Fargo.
That is good, but Mr Trump is not in a position to compel them to. The United States is about to go through a months-long liquidity crisis in the shops, restaurants and wallets of the real economy. The quickest path to make sure that banks keep credit lines open, runs through the Federal Reserve.
The Fed has spent the last year in a monetary policy review, wondering openly about how well its kit will work in the next recession. Its main policy rate is already at 1-1.25 per cent, which does not leave much room to drop it. The surprise half-point cut on March 3 already feels like a Pre-Cambrian event.
Treasury yields are now uncomfortably close to zero, too, which will make overt quantitative easing difficult. You cannot push the long end of the curve down when the long end of the curve is already down.
That is monetary policy, though. The Fed is still a lender of last resort. It can still do liquidity policy, as it showed on Thursday when it offered to put a trillion dollars a week into the one and three-month funding markets. “It’s simpler to create liquidity than to create aggregate demand,” said Peter Fisher, former head of the Fed’s markets desk. “There are fewer steps.”
On Monday, the Fed made a brief announcement that may end up becoming one of the more important actions it will take in this crisis. Along with other regulators that cover the entirety of national and local banks, it urged lenders to “work constructively with borrowers and other customers in affected communities”, adding that “prudent efforts . . . should not be subject to examiner criticism”.
That one step signalled to local banks that they could keep their own borrowers liquid, and that their regulators would help them do it. This has happened before, after September 11 and Hurricane Katrina. It is hard to find exact precedents for a global pandemic, but it is in one way similar to a terrorist attack or a hurricane, in that business comes to an immediate halt.
Large corporations have savings and lines of credit to make payroll, but shopkeepers with no revenues are at immediate risk of missing next month’s rent.
“Let’s not get finicky,” said Mr Fisher, now at Dartmouth’s Tuck School of Business. “Let’s get things moving.” He points out that a pandemic is even worse than a natural disaster, in several ways. It is a rolling disaster happening all over the country. And, perversely, since there is no destruction of property, there is nothing that ignites growth after it passes. The upward swing of a “V” dip in growth after a hurricane comes from the rebuilding that puts contractors back to work.
Ernie Tedeschi, policy economist for Evercore ISI and a former Treasury official, says the next step for the Fed would be to set up a Term Auction Facility, as it did during the financial crisis. A TAF would make one-month and three-month financing available not just to the Fed’s 24 large primary dealers, but for any sound depository institution down to a local credit union.
“The Fed has a chain to the real economy,” said Mr Tedeschi. Term financing for all banks, he explains, would put a “concrete facility” behind the Fed’s instructions to local lenders to help out their own customers when foot traffic to retailers simply stops.
“We think the Fed will recognise that asset markets will respond positively to policies that help viable companies to survive the economic disruption from the outbreak,” wrote Steve Englander, head of macro strategy for Standard Chartered Bank. “This points to an emphasis on ensuring that banks deliver cheap credit to businesses and even households, rather than focusing on the Fed funds and Treasury yields.”
Both Mr Tedeschi and Mr Englander think a Fed announcement on local liquidity — or at least a solid expression of intent — could come as soon as the next scheduled statement on March 18.
The advantage of guidance, backstopped by a real, TAF-like lending facility, is that the Fed has done something like it before, and does not need permission from anyone to do it. Even under the changes to the Federal Reserve Act that followed the financial crisis, the Fed does not have to come to an agreement with the Treasury when it comes to TAF.
Mr Moynihan and Mr Corbat and Mr Scharf can promise to help, and let us take them at their word that they intend to. But the Fed can provide liquidity now.
brendan.greeley@ft.com
Source: Economy - ft.com
