Is it possible the Fed over-reacted to a natural disaster?

There are two different types of “recessionary” events that occur throughout history. The first is a “business cycle” recession, which happens with some regularity as excesses build up in the economy. These cycles generally take 12-18 months to complete as those excesses are reversed.

Then there are “event-driven” recessions that can occur from “natural disasters.” These are generally much shorter in duration and can be sector specific. One such event was the Japanese earthquake/tsunami in 2011, which led to a temporary manufacturing recession.

Understanding the type of recessionary cycle you are fighting is essential in ensuring the Government applies the correct monetary and fiscal response. As with any illness, the application of the wrong medication can lead to unintended consequences.

There are growing expectations of the COVID-19 economic shutdown, and the subsequent recessionary backlash will be very short-lived. The assumption is that if the economy reopens, the activity will resume, and the economy will quickly regain its footing.

If such an outcome is indeed the case, has the Fed applied the wrong “medication” to cure the economic patient?

Monetary Medicine

As I addressed in “Is The Debt Chasm, Too Big For The Fed To Fill.”

“Over the last month, the Federal Reserve, and the Government, have unleashed a torrent of liquidity into the U.S. markets to offset a credit crisis of historic proportions. A list of programs already implemented has already surpassed all programs during the ‘Financial Crisis.'”

  • 03/06 – $8.3 billion “emergency spending” package.
  • 03/12 – Federal Reserve supplies $1.5 trillion in liquidity.
  • 03/13 – President Trump pledges to reprieve student loan interest payments
  • 03/13 – President Trump declares a “National Emergency” freeing up $50 billion in funds.
  • 03/15 – Federal Reserve cuts rates to zero and launches $700 billion in “Q.E.”
  • 03/17 – Fed launches the Primary Dealer Credit Facility to buy corporate bonds.
  • 03/18 – Fed creates the Money Market Mutual Fund Liquidity Facility
  • 03/18 – President Trump signs “coronavirus” relief plan to expand paid leave ($100 billion)
  • 03/20 – President Trump invokes the Defense Production Act.
  • 03/23 – Fed pledges “Unlimited QE” of Treasury, Mortgage, and Corporate Bonds.
  • 03/23 – Fed launches two Corporate Credit Facilities:

    • A Primary Market Facility (Issuance of new 4-year bonds for businesses.)
    • A Secondary Market Facility (Purchase of corporate bonds and corporate bond ETFs)
  • 03/23 – Fed starts the Term Asset-Backed Security Loan Facility (Small Business Loans)
  • 04/09 – Fed begins several new programs:
    • The Paycheck Protection Program Loan Facility (Purchase of $350 billion in SBA Loans)
    • A Main Street Business Lending Program ($600 billion in additional Small Business Loans)
    • The Municipal Liquidity Facility (Purchase of $500 billion in Municipal Bonds.)
    • Expands funding for PMCCF, SMCCF and TALF up to $850 billion.