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Macroscope
Central banks riding to the rescue of crashing debt markets must think twice
- Aside from the moral hazards of such a massive bailout, the risk is that a wall of central bank money meeting slumping growth and output can cause the greater damage of hyperinflation
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Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs.
Financial markets are, to quote one seasoned and expert observer, “in full-blown panic mode” while the United States Federal Reserve and other central banks are poised to go into full-blown lender-of-last-resort mode. All this is being blamed on the coronavirus pandemic but in truth it is (yet) another financial market crisis.
Asset markets have long been primed for a crash and now it has come, with US stocks back in bear market territory after suffering their worst one-day slump in more than a decade, despite supposedly calming actions by the Fed and the European Central Bank. Coronavirus was the trigger but not the cause.
More worrying than the long-overdue correction to equity values is that the US Treasury market – the fulcrum of global financial market liquidity – is showing signs of seizing up. That would provoke a systemic financial crisis perhaps worse than in the 2008 financial crisis.
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It will not be allowed to happen (for now, at least) because the Fed will be forced to step in and reliquefy it, “thus aggravating the moral hazard it has been running for some time”, as Hung Tran, a former senior official at the Institute of International Finance, put it to the Post.
In effect, this means the Fed will underwrite the risks of a market which has exploded in size since the global financial crisis, along with the massive growth in US corporate debt. The value of much of this debt is predicated upon faith, rather than underlying assets.
Central banks are already preparing to underwrite or monetise huge volumes of government debt as calls for fiscal stimulus to offset a feared global recession reach a pitch. This game will have “consequences” and not too far down the road.
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