The US central bank, the Federal Reserve, did a very big thing this afternoon.
It announced it was to buy debt on the open market "as necessary" as well as a whole range of lending programmes for different business sectors, including small businesses.
The phrase "big bazooka" is sometimes used to describe a massive intervention by a central bank which blasts fears about debt levels by flooding the market with money. Today’s move by the Fed was more than a big bazooka. The Fed has indicated it’s prepared to leave the tap running.
This means it’s going to ensure that all bonds in the debt market, which include bonds raised by the US Treasury, state government bonds, as well as mortgage-backed bonds and bonds raised by companies will all find a buyer of last resort. That will ensure the rates charged on that debt will remain low. So it reduces one risk that companies and governments face as they struggle to survive the fallout from the coronavirus pandemic.
So how did the markets react? With typical ingratitude, albeit underpinned by a certain logic.
Shares in the US seemed initially to respond positively only to take a downward turn again. Why? Well possibly because investors think the limits of monetary policy have been reached.
Companies - and in this case, the US government - will find it easier to raise money as a result of today’s actions. But would a company want to raise money if there’s no chance to sell the products it makes for the foreseeable future? Can the product even be made?
And if you’re investor, would you place your money in a company that you can’t see being in a position to do any business while the majority of the population is confined to quarters?
It’s a weird situation. Tell me about it, I hear you say as you struggle with the demands of social isolation/physical distancing/general cabin fever.
The other arm of economic policy is fiscal policy. That’s what governments spend. They spend what they raise from taxes. When there’s not enough of that, they raise it on the bond markets and pay that back over time through taxes.
In the US, there’s still a lot of debate over the final shape of its stimulus plan. It’s an election year, so there’s even more argy-bargy than usual.
On our side of the Atlantic, the cost to eurozone governments of raising money was dealt a decisive blow by the ECB’s $750 billion bazooka last week. The impact on cutting the cost of borrowing for countries like Italy was immediate.
Governments will need to borrow to pay for the enormous resources that will be needed to be ploughed into public health systems.
But we will need to get used to the idea that governments will need to pay for a whole lot more, hopefully only for a short period of time.
Last week both Ibec and SIPTU drew attention to the need for a wage subsidy scheme along the lines of Germany’s "Kurzarbeit" model which has been followed by Denmark and the UK.
In simple terms, companies that are forced to put their workers on short time have their wages supplemented by the State up to a certain maximum.
Today, we have vast swathes of our economy where public health dictates that companies must not function or only operate on a vastly reduced basis. In order for those sectors not to suffer long-lasting damage, its workers should remain connected to those companies. That means the State needs to step in.
The corollary of this is that the companies themselves, to avoid becoming insolvent, may also need to be funded for a short period by the State.
That’s a very hard sell politically. It’s also practically almost impossible for one government to do this on its own. Why? Because many companies are multinational in terms of ownership and have operations and markets across several countries.
The idea of "eurobonds" which means EU member states raising money collectively was the subject of much debate during the eurozone financial crisis. Eventually, a way around this was found with the establishment of the European Stability Mechanism (ESM) which is a bailout fund for bank crises with working capital provided proportionately by member states, sometimes through gritted teeth.
The ESM still has "Smash in Times of Crisis" written on it. But there is really no need to smash this piggy bank. The ECB has ensured that money can be raised very cheaply. It could be raised cheaper still if the efforts to come up with a "Corona Bond" or "European Health Bond" ever become a reality.
In 2014, the Bank of England made headlines when it announced it was to repay £218m of its World War One bonds one hundred years after the war began. In fact, the history of that particular batch of government bonds stretched back even further. The bonds were originally raised at the time of the South Sea Bubble in the eighteenth century. They were rolled over and re-financed to pay for the Napoleonic and later Crimean wars.
There’s much talk that we’re in a war against the virus. Wars have always been financed. Money is important but it’s worthless if there are no economies left to use it.