The Financial Virus Will Infect Our Politics
One does not need to be prescient to understand that the consequences of the U.S. government’s financial response to the coronavirus will be momentous.
The U.S. Federal Reserve recently announced nine new “facilities” (lending programs) and its balance sheet has surpassed the $6 trillion mark. Even the maniacal asset-buying of the post-financial crisis years never took the balance sheet beyond $4.5 trillion. It will go much higher than $6 trillion in the months to come because the Fed is intent on providing dollars, credit and liquidity to just about everyone. That includes numerous central banks with which the United States has swap agreements and a facility called FIMA that lends money to foreign governments in exchange for U.S. Treasuries used as collateral. The aim is to suppress interest rates that were going to rise given that foreign governments were selling U.S. paper in order to obtain much-needed U.S. dollars.
Many people think that the Fed’s unprecedented intervention in the post-financial crisis did not generate inflation because consumer prices did not shoot up. To some extent this is true—in part due to the fact that households avoided going on a spending spree and the fact that the U.S. economy remained reasonably productive while many debtors were trying to deleverage. But monetary interventionism caused major problems, including crazy stock market valuations and an insane amount of corporate debt cheaply incurred with the purpose of buying back stock—at whatever price.
These distortions are now coming home to roost: The stock market lost about a third of its value after the coronavirus crisis started, and the U.S. government is having to bail out corporations that have lost their investment grade because of too much debt (corporate debt now amounts to almost 50 percent of the size of the economy). The severe distortions caused by U.S. monetary policy after the financial crisis mean that a large part of corporate America and other entities, including the financial institutions, are now being bailed out through bottom-up wealth redistribution.
When that happened—on a smaller scale than now—after the financial crisis, the result was enraged populism. I don’t mean healthy, Jeffersonian populism but rather the kind that bends rules and institutions, creates class divisions, redistributes wealth arbitrarily, messes with private property, undermines international trade, and spends colossal amounts of money. In the United States populism took hold of both political parties and much of civil society. Imagine what could happen this time.
Sure, the U.S. government will also bail out households—eventually. After all, household debt, if we count mortgages, student loans, auto loans, credit card loans and other types of credit, amounts to more than $14 trillion. And the Fed has already announced that it will purchase asset-backed securities that will help rescue those types of debts. But for the moment creditors and shareholders, rather than Main Street, are the largest and most direct beneficiaries of monetary policy. The political backlash could be grave.
Not to mention that bailing out debtors by generating more debt can only lead to more problems. Of course, in the type of once-in-a-lifetime crisis we are now experiencing, some form of government intervention to provide liquidity and oxygen to an economy that recently saw 16 million new requests for unemployment benefits is almost inevitable. But it is one thing to do this on a limited scale because economic agents are financially strong, and quite another to do it on the kind of scale we are seeing because almost everyone in America, under heavy incentives from the U.S. government, has been addicted to debt for far too long.