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In societies like the United States, where the upper middle class is intensely interested in their private retirement portfolios, this unleashed a wave of fear. A deeper level of anxiety concerned the mountain of debts in the emerging markets and the liabilities on the balance sheets of big corporations. By mid-March, with Europe reeling under the impact of the disease, the euro area sovereign debt market was coming under stress. All this was bad, but the truly terrifying shock of March 2020 was the seismic tremor that ran through the market for U.S. Treasuries, American government debt.
American government debts are the safe assets on which the entire structure of private finance rests. They are the foundation of America’s financial might and thus of the world order as we know it.
Far more worrying than equity markets was what was happening in the market for bonds, and above all, U.S. Treasuries—the safe assets that promise a counterbalance to volatile equities.
In times of uncertainty and recession, as investors lose confidence, they tend to shift from shares, whose prices fluctuate with business fortunes, to government debt that can be sold at a steady price or can be used as collateral for borrowing on good terms. At the top of the pyramid of safe assets are dollar-denominated U.S. Treasuries.2 Their status as the ultimate safe asset is not due to the strength of the dollar, which has progressively depreciated for half a century. Nor does it stem from the fact that U.S. fiscal policy has the highest reputation for probity. U.S. Treasuries are the
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At the start of 2020, there was almost $17 trillion in U.S. government IOUs in public circulation. These are backed by the most powerful state with the biggest tax base, and they trade in the deepest and most sophisticated debt market.3 You buy U.S. Treasury securities because the market is so big that in an emergency you can sell them without your sale affecting the price. There will always be someone who wants to buy your Treasuries. And there will always be important bills you can settle in dollars. When we say that the U.S. dollar is the reserve currency of the world, what w...
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But then, gathering force from Monday, March 9, something more alarming began to happen. The run for safety turned into a panic-stricken dash for cash.4 Investors sold everything—not just shares, but Treasuries too. That was very bad news for the economy, because it sent interest rates up—the opposite of what business needed. Even more disturbing than the perverse movement of bond prices and yields was the fact that the biggest financial market in the world was, in the words of one market participant, “just not functioning.”5 The trillion-dollar Treasury market, which is the foundation of all
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If the banks had been as weak in 2020 as they were in 2008, core loss-absorbing capital across the entire system would have been slashed to a low of 1.5 percent of assets, less than a sixth of what is considered safe. Several of America’s biggest banks would have failed, requiring gigantic and politically toxic bailouts.10 Mercifully, thanks to tough new regulations and the banks’ own efforts at self-preservation, their balance sheets on both sides of the Atlantic were far stronger in 2020 than in 2008. To ensure that they stayed that way, bank regulators around the world in March 2020 barred
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In March 2020 the run extended to every class of assets in the financial system. It was no longer a run into safer investments, but a general dash for cash.
Bad as the situation was for the traders, it was the computerized algorithms that were doing much of the damage. In one of the most sophisticated markets in the world, 75 percent of the market-making in U.S. Treasuries is done by algorithmic trading.
The prospect of escalating dysfunction in the Treasury market collapse was horrifying. A “safe” asset that could no longer be easily sold, or could be sold only at a fluctuating discount, was no longer a safe asset. It ought to have been unthinkable to even ask that question about U.S. Treasuries. And if the implosion of the financial system was not bad enough, Bank of America strategist Mark Cabana spelled out the wider implications. As he warned in mid-March, if the Treasury market stopped functioning, it was “a national security issue.”
In a general run like that which had set in in March 2020, only one thing will restore confidence—limitless cash. And in the world’s dollar-centered financial system, only one actor can provide that: the U.S. Federal Reserve. It would need to act not just as a lender of last resort, but as a market maker.
Powell was nominated to the Fed board in 2011 as a bipartisan candidate after he helped to convince Tea Party diehards in Congress that refusing to authorize new borrowing and forcing the federal government to live hand to mouth from tax revenue would be disastrous.28 Powell was not just a smooth operator. He was also a man with a philanthropic conscience. He favored a tight labor market as the best way to address inequality and inherited a Fed organization that under both Bernanke and Yellen had recognized that it could not ignore America’s stark social disparities.
The Fed was a competent, high-functioning piece of the U.S. state apparatus. As such, it had unsurprisingly attracted Trump’s ire in the years prior to 2020.
As a repo lender, the Fed was propping up the Treasury market by helping others to buy. The question was when it would step in itself.
In effect, the Fed was assuming the role of a central bank to the world, dispensing dollars to every part of the credit system that was tight. In 2008 the swap lines had thrown a lifeline to Europe’s ailing banks. Now it was above all the Asian financial institutions that needed support.35 If they could get dollar funding from the Bank of Japan or the South Korean central bank, that would reduce the need to sell Treasuries.
Activating these elements of what is known as the global financial safety net does not require a dramatic stage-managed meeting of heads of government, at the G20 or somewhere like it. It can be done through relatively informal conference calls between a group of central bankers and their senior staff. It is a community as cosmopolitan as that in a scientific discipline, but smaller and even more close-knit. It has outliers in national treasuries, at the IMF and the BIS, and in many of the largest banks and asset managers. The ecosystem is completed by academic commentators and influential
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The foreign exchange market, where currencies are traded, is the biggest market in the world. Despite Britain’s faded status as a financial power, the place where most transactions are booked is the City of London.
On Wednesday, March 18, on the terminals in the banking towers of Canary Wharf there was only one trade: Sell every currency in the world. Buy dollars.
At the high point of the program, the Fed was buying bonds at the rate of a million dollars per second. In a matter of weeks, it bought 5 percent of the $20 trillion market.56
If the financial markets had suffered a heart attack in March 2020, most of the world would have suffered, but the benefits of the recovery were distributed unequally. Worldwide, the wealth of billionaires rose by $1.9 trillion in 2020, with $560 billion of that benefiting America’s wealthiest people.57 Among the surreal and jarring juxtapositions of 2020, the disconnect between high finance and the day-to-day struggles of billions of people around the world stood out. —
In the years since the dot-com bust of 2000–2001, central bankers had moved from being ringmasters to ever more frantic jugglers of liquidity. It was Mario Draghi who in 2012 gave the era its mantra: “whatever it takes.”
When Jay Powell, Andrew Bailey at the Bank of England, and Christine Lagarde at the ECB were chosen to head their respective central banks, there was a sense that they belonged to a postheroic generation. After the radical interventions of the period between 2008 and 2015, their primary task was to restore order. Their goal was normalization.
Not only did the central banks act on an unprecedented scale, but they did so with an alacrity that betrayed the increasing disinhibition of the preceding decades. In 2008 there had still been a note of hesitancy about central bank interventions. In 2020, that was gone. The full implications of the opening of the monetary floodgates would become clear over the weeks that followed, as fiscal policy caught up. This was emergency action of the most radical kind. But what now was normality?
The scale of this spending and tax relief in 2020 was crucial in mitigating the social disaster that might otherwise have resulted from the shutdowns. Indeed, it was of such a scale that it warranted talk of war economies and a new social contract.
Such comparisons with the mid-century heyday of Keynesianism no doubt help to capture the drama of the moment. They express the wish of many, on the left as well as the right, to return to that moment when the national economy was first constituted as an integrated and governable entity. As the interconnected implosion of demand and supply demonstrated, macroeconomic connections are very real. But as a frame for reading the crisis response in 2020, this retrofitting risks anachronism. The fiscal-monetary synthesis of 2020 was a synthesis for the twenty-first century.
While it overturned the nostrums of neoliberalism, notably with regard to the scale of government interventions, it was framed by neoliberalism’s legacies, in the form of hyperglobalization, fragile and attenuated welfare states, profound social and economic inequality, and the overweening size and influence of private finance.
As tempting as the war analogy might be, it was not apt for the situation of 2020. The problem was not how to mobilize armies. The challenge was to demobilize the economy and keep people at home. Even within the health care system, non-emergency care and procedures were put on hold. What was needed was not stimulus or mobilization, but life support.
Steady GDP growth is the duct tape holding together this jerry-rigged social order in which low-income Americans have little to no emergency savings, many basic welfare benefits are contingent on employment, and the threadbare safety net is patchy by design. This top-heavy, gold-plated jalopy of a political economy can pass as road safe in fair weather; try to ride it through a once-in-a-century epidemiological storm and it starts to break apart.
In 2009, congressional Republicans had voted almost to a man and woman against the crisis measures of the Obama administration. In 2020, the political stars aligned very differently. The election was still ahead. The Republicans had their own man in the White House. If they wanted to pass a stimulus bill, they would need to come to terms with the Democrats. This did not stop conservative gadflies like Lindsey Graham from trying to derail the coronavirus stimulus over the $600-per-week supplement to unemployment benefits, which he considered excessive.
If the worst predictions of March and April did not come to pass, it was in part because of the scale of these interventions. The fiscal packages of 2020 were not stimulus in the conventional sense. Given the supply constraints due to the shutdown, they could not generate the multiplier effect one would normally hope for. What they did do was to provide income security and maintain demand in those areas of the economy that were still functioning.
Given the scale of the fiscal interventions in 2020, if the political will had been there, it would not have been unreasonable to talk about a new or at least a renewed social contract.29 There were elements in the giant flow of money that were undoubtedly novel.
31 A major contributor to the extreme income inequality that distinguishes the United States from other rich countries is its ungenerous welfare system. In 2020, for a brief moment, that changed.
It is hardly an exaggeration to say that the CARES Act was America’s first experiment since the 1960s with welfare on a scale befitting a rich country. This would horrify conservatives. They complained about the loss of incentive to work. That pertained above all to the supplement to unemployment insurance benefits. The CARES Act stimulus checks, on the other hand, could easily have been cause for celebration in the conservative camp. Not only was their president’s name on the checks. This was not the welfare state of old. Handed out to everyone below a certain income level, this was “welfare
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In general, the net effect of tax and welfare systems in all countries is to reduce inequality at least to some degree. However, welfare can also serve a conservative function. Indeed, the historic purpose of the welfare state as it emerged in Bismarckian Germany in the 1880s was precisely that—to preserve the social status hierarchy across the vicissitudes of sickness, old age, and, eventually, unemployment.34 That was the principal logic of spending in 2020. The crisis affected the entire economy. No one was to blame. Everyone should be made whole. So the range of potential claimants on
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hundreds of billions were sluiced into the airlines and fossil fuel industries. In the United States, $61 billion was allocated to support the aviation industry and its workforce.40 Across the OECD, by August 2020 government support of the airline industry ran to $160 billion, of which a quarter was to pay wage bills and the rest took the form of direct subsidies, equity stakes, or loans.
In 2017 the Trump presidency and the GOP had enacted a huge tax cut that primarily benefited higher income earners. To get a congressional majority, they had been forced to accept technical restrictions that limited, for instance, the deductions available to the largest firms on the interest they pay on debt, or the extent to which business losses could be set against capital gains on stock portfolios.
In the 2020 CARES Act, those limitations were lifted. The benefit, for America’s rich, for private equity firms, for households earning over $500,000 per annum, and for firms with turnover of more than $25 million per annum, ran to $174 billion.42
For all the talk of a new social contract and the scale of the spending, coronavirus fiscal policy was as much a reflection of preexisting interests and inequalities as any other area of government action.
Every detail of the trillion-dollar programs reveals the mark of inequality, but as revealing as such forensic investigation is, to fully grasp the political economy of the crisis response we need to take a step back and ask how the fiscal response was paid for. How did fiscal and monetary policy, treasuries, and central banks cooperate to enable the programs to go ahead?
It was the most spectacular surge in debt ever recorded in peacetime. In conventional preconceptions, a flood of public debt on this scale presented a giant challenge to the balance between private saving and private investment. Government borrowing would suck scarce savings out of the economy, driving up interest rates, thus crowding out private investment. This was the economic complement to the naive conservative vision of the welfare state as being for poor people and the government as being a racket run by civil servants at the expense of the rest of society. What fiscal policy gave, the
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While 2020 may have been extreme, the fact that interest rates fell as debt surged wasn’t in fact a new trend. Over recent decades, even as public debt was on a secular upgrade, interest rates had been moving in the opposite direction. This was one of the phenomena that moved Larry Summers in 2013 to suggest that we were living in an age of secular stagnation.
As Olivier Blanchard, the former chief economist of the International Monetary Fund, pointed out, so long as interest rates remained below the growth rate, any debt burden was sustainable.
The shift from a world in which central bank independence was founded on not buying government debt to one in which central banks around the world warehoused trillions of dollars in debt was bewildering. And it was all the more so because it happened tacitly, without frank acknowledgment of the transformation. As Paul McCulley, the former chief economist at the giant bond house PIMCO, put it, “We’ve had a merger of monetary and fiscal policy. We’ve broken down the church-and-state separation between the two . . . We haven’t had a declaration to that effect. But it would be surprising if you
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One obvious interpretation was that the monetization of giant stimulus spending was the belated and long overdue triumph of radical Keynesianism, a return to the logic of so-called functional finance first spelled out in World War II.55 The zealous new school of Modern Monetary Theory rode to prominence on the coattails of Bernie Sanders and his revival of the American left.56 In the UK, there was talk in the circles around Jeremy Corbyn’s Labour Party of “People’s QE” and radical experiments with helicopter money.
Were central banks active market makers, or, in practice, more like warehouses?
They were buying debt to massage the interest rate, and they were entitled to do that because their basic task was to ensure price stability, which in 2020 meant that the economy must be prevented from sliding into deflation. Avoiding deflation meant stimulating demand by all means. For the central bank, that meant holding interest rates down. Once again it came down to financial markets. As far as anyone could figure out, QE worked by driving government bond prices up and yields down.
Rather remarkably, they insisted that tending to financial markets was a more legitimate social mission than openly acknowledging the highly functional, indeed essential role they played in backstopping the government budget at a time of crisis.
Even in its heyday, Keynesianism had been an incomplete revolution at best.
What on its face looked like a powerful synthesis of fiscal and monetary policy working in harmonious coordination to help fund a generous new social contract revealed itself on closer inspection to be a confused and ill-shapen monster, a policy regime somewhere on the spectrum between Frankenstein and Jekyll and Hyde.
A peculiarity of 2020 was that the aim was not stimulus, but life support, paying people not to work or produce.
