Trillion Dollar Triage by Nick Timiraos

Author:Nick Timiraos [Timiraos, Nick]
Language: eng
Format: epub
Published: 2022-03-02T00:00:00+00:00

“This is a bad one”

The 2008 financial crisis also demonstrated that the Fed, using some clever legal work-arounds, wasn’t as constrained from purchasing assets as many initially thought. The Federal Reserve Act restricts the central bank to purchase only government debt, government-backed mortgage securities, and short-term municipal bonds. But the program known as the Commercial Paper Funding Facility had shown that the Fed could creatively sidestep these restrictions by again invoking its “unusual and exigent” authority. By October 2008, the market for commercial paper was deteriorating. To purchase these otherwise ineligible securities, the Fed could create an “unusual and exigent” lending program in which a designated reserve bank—in this case, the New York Fed—forms a new corporate entity that purchases commercial paper. The only catch was that Fed officials had to be confident they wouldn’t lose money, which could invite harsh scrutiny from lawmakers.

The idea that invoking “unusual and exigent” circumstances would spook investors, as the Fed had feared twelve years earlier, felt quaint by March 2020. Even if the monetary weapons remained politically controversial, many on Wall Street believed they had provided Bernanke with the big guns needed to beat back the 2008 crisis. By Monday, March 16, 2020, the Fed had fired most of its other munitions, but markets were still dropping. Investors and other market watchers wondered when the Fed would deploy its “unusual and exigent” response.

Larry Kudlow teased a forthcoming announcement on the White House lawn a few minutes before noon on Monday. “The Fed has enormous power, enormous power,” he said. “And it looks like they’re going to start using it in connection with the Treasury Department and the president.”

Later that afternoon, at 3:20, President Trump returned to the White House briefing room to deliver an uncharacteristically sober report about the risks facing the nation. He encouraged all Americans, even the young and healthy, to work or attend school from home if possible. “Avoid gathering in groups of more than ten people,” he said, reading off a sheet. “Avoid discretionary travel. And avoid eating and drinking at bars, restaurants, and public food courts. With several weeks of focused action, we can turn the corner and turn it quickly.”

Reporters pelted Trump with questions: How long might this virus mess last? “People are talking about July, August, something like that… Could be longer than that,” the president said. “This is a bad one. This is a very bad one. This is bad in the sense that it’s so contagious.”

Markets were already getting pounded, and they fell further that afternoon as Trump spoke. The president was still at the podium at 4 p.m. when trading closed for the day. The Dow Jones Industrial Average had fallen 2,997 points—nearly 13 percent. It was the largest point decline ever, the second-largest percentage decline since Black Monday in October 1987, and worse than any single trading day during the Crash of 1929. Treasury yields, thankfully at least, fell that day after the Fed bought $40 billion in government debt, setting another record.

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