Coronavirus stimulus is needed now, despite the risk to the post-pandemic financial landscape
- The Federal Reserve has made a momentous decision to purchase the debt of companies, including the bonds of junk-rated firms. Such aggressive stimulus measures are shoring up asset prices, but storing up trouble for the financial system
While successive rounds of quantitative easing and dramatic cuts in interest rates were credited with helping stave off a devastating depression following the collapse of Lehman Brothers in 2008, the unintended consequences of cheap money – heavily distorted markets, an unhealthy dependence on central banks and rising inequality as wealthier households gained most from the surge in asset prices – have become much more pronounced in recent years.
Yet, if the withdrawal of stimulus was problematic before the pandemic, it is now unthinkable.
Ever since fears over the economic damage wrought by Covid-19 sent markets into a tailspin, the big central banks have thrown everything but the kitchen sink at the financial system to prevent a 2008-style crash.
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In a report published last month, Citigroup estimated that the leading central banks will buy US$5 trillion of assets this year, more than twice the size of the stimulus deployed at the height of the 2008-9 crisis.