The Fed’s Emergency programs are Masking the Real Issue – Lee Chandler

The Federal Reserve announced that they would extend seven of its emergency lending and credit programs to the end of the year. The move was somewhat surprising considering the recent lack of demand for loans. Greg Robb of MarketWatch reports, “the Fed’s lending to primary dealers has unwound from a peak of $33 billion on April 15 to $1.7 billion on July 15. To date, its Main Street Lending Program to businesses has been very small, with $14 million extended” (“Fed extends emergency loan programs for three months until end of 2020”). This example highlights a bigger problem in that the trend of continuous printing and lending of money by the U.S. federal government, which started before the COVID-19 pandemic, will lead to inflation with no economic output, also known as stagflation.

In the Fed’s Financial Stability Report for May 2020, it was acknowledged that business debt levels were high relative to GDP, with the riskiest firms accounting for most of the increase in debt in recent years along with the fact that the pandemic would exacerbate the issue of already elevated delinquency rates on student loans (United States, Federal Reserve System, Board of Governors 33, 40). These problems indicate a fundamental flaw in that the U.S. economy has grown artificially rather than through actual production. The U.S. has inflated its economy through quantitative easing, which has led to lower borrowing standards and financial markets that do not paint an accurate picture of the overall economy. For instance, quantitative easing has artificially driven up prices of bonds and given a false narrative about rising debt underwriting revenue, leading investors to take on more risk than they should. U.S. GDP has contracted at the moment and companies are still cutting jobs, so the result will be stagflation if it has not happened already. 

Regarding student debt, having federal student loans available from the U.S. Department of Education enticed students because they did not have to pay out of pocket at the moment, which in turn enticed universities to increase tuition. This leads to the quality of universities to decrease, leading to graduates not having the skills to succeed in the workforce and not being able to find stable work while still having to pay back student loans in full. The government can solve this issue by making drastic spending cuts in its other programs through hiking interest rates, although in the case of hiking interest rates it is highly unlikely given that Jerome Powell, Chair of the Federal Reserve, mentioned that he has not given any thought to the idea. 

Even though the black swan that was COVID-19 warranted the federal government to implement emergency programs during the beginning stages of COVID-19’s spread in the United States, COVID-19 was going to lead to economic uncertainty no matter how much money the Fed printed and loaned out to businesses and individuals. The only question was how long the uncertainty would continue. If the federal government continues to do more than what is necessary, then uncertain economic times will turn into long, certain bad economic times because of the implosion of the dollar with no economic output. 

References

Robb, Greg. “Fed extends emergency loan programs for three months until end of 2020.” MarketWatch. 28 Jul. 2020, https://www.marketwatch.com/story/fed-extends-emergency-loan-programs-for-three-months-until-end-of-2020-2020-07-28. Accessed 29 Jul. 2020. 

United States, Federal Reserve System, Board of Governors. “Financial Stability Report – May 2020.” Financial Stability, 1 May 2020,  https://www.federalreserve.gov/publications/files/financial-stability-report-20200515.pdf

 

Author: Jason Caci

 

By admin

Leave a Reply

Your email address will not be published. Required fields are marked *