The
New York Times
By mid-March 2020, a sense of anxiety invaded the Federal Reserve. The dizzying coronavirus pandemic was spreading dangerously across world markets.
Transactions with US Treasury bills – government securities considered among the safest assets in the world, and the foundation of the entire bond market – became less fluid when terrified investors tried to sell everything they had to get cash. Sellers were in short supply. The securities market has never collapsed so much, not even in the worst moment of the 2008 financial crisis.
The Fed called an emergency meeting on March 15, a Sunday. Lorie Logan, New York Fed asset portfolio supervisor, summed up the looming crisis.
He made a stark assessment: While the Fed had been buying government-backed bonds in the past week to calm the volatility of the securities market, market contacts said it had not been enough. To sort things out, the Fed I would have to buy a lot more. And fast.
Fed officials are a prone to arguing, and they hotly debated whether or not to cut interest rates to near zero.
But, in the face of testimony to the severity of the government bond market crash, there was no dissent on whether the central bank had to step in as a buyer to stop what was happening. That afternoon, the Fed announced a gigantic purchase program, promising to make US $ 500,000 in purchases of government bonds and acquire US $ 200,000 million in debt backed by mortgages.
The rescue worked, so it’s easy to forget the danger investors and companies faced a year ago. But the system’s weaknesses exposed last March persist, and are now under the scrutiny of Washington officials.
How it began
Financial markets began to falter on February 21, 2020, when Italian authorities announced localized closings.
On March 3, as market nervousness intensified, the Fed cut interest rates to around 1% – its first emergency measure since the 2008 financial crisis. Some analysts accused the body of overreact and others asked the obvious question: What could the Fed do in the face of a public health threat?
Confinements in Italy sharpened during the second week of March, and oil prices collapsed in the heat of a price war, shaking equity, currency and commodity markets. Then, something strange started to happenInstead of turning to Treasuries – the world’s safest investment, it is said, investors started trying to sell them.
The yield on 10-year Treasury debt – which often falls when investors seek a safe haven – began to rise on March 10, suggesting that investors did not want safe assets, but cold hard cash, and they were looking to sell everything to get it.
How it got worse
Religion works through the churches. Democracy, through congresses and parliaments. Capitalism is an idea that became a reality through a series of relationships between debtors and creditors, risk and reward. And by March 11, those equations they no longer served. That day the WHO officially declared that the virus had unleashed a pandemic, and in the morning of that day the selling trend reached the point of panic.
The Fed began rolling out measures to ease conditions, first offering large temporary cash injections to banks, then accelerating initiatives to buy Treasury bills when that market spiraled out of control. But for Friday March 13, government bond markets were just one of many problems.
Investors drew their cash from mutual funds in low-risk money markets. But those cash outflows began to accelerate, causing the funds themselves to snap out of short-term corporate debt markets in a race to be able to return money to investors. Banks acting as market intermediaries were less willing than usual to buy and hold new securities, even temporarily. That made selling everything more difficult, whether it was a corporate bond or Treasury debt.
But Jerome H. Powell, Fed Chairman, was concerned that the solution was insufficient and that short-term and long-term debts of all kinds would result. hard to sell. He then asked Andreas Lehnert, director of the Fed’s financial stability division, to prepare emergency credit programs, which the central bank had used in 2008 as a support system for troubled markets.
But by the end of that week, everything was a mess. Foreign central banks and corporations ditched US debt, in part to acquire dollars that corporations needed to pay interest and other bills; Hedge funds were rejecting highly leveraged trades that had collapsed when the market went berserk, dumping Treasuries into the stifled market. The commercial real estate and corporate bond markets looked risky as companies faced downgrades and hotels and malls saw their business prospects fail.
The most powerful central bank on the planet was proposing solutions to the markets as quickly as it could, and it was not enough.
How they solved it
The following weekend, March 21-22, was a frenzy. Authorities communicated from their homes, completing the guidelines of a still-secret program and negotiating with Treasury Secretary Steven Mnuchin’s team to establish a scheme to protect efforts against credit losses. After a stormy 48-hour bustle, the Fed issued a lengthy press release Monday morning.
There promised buy an unlimited amount of Treasury debt and purchase mortgage-backed securities.
The announcement also pushed the central bank into uncharted territory. The Fed was created in 1913 to act as a lender of last resort to distressed banks. On March 23, he pledged to help beyond that financial cost. The Fed said it would buy corporate debt and help midsize firms get credit for the first time in its history.
It finally worked. The March 23 efforts had an approach that Lehnert referred to internally as “Cover all fronts”. Economists had discerned which capital markets were tied to large numbers of jobs and made sure each of them had a Fed support program.
On April 9, backed by a huge amount of money from a bailout package just approved by Congress – $ 454 billion – officials said they would expand already announced efforts and promote others to direct money to states and large cities. .
The Fed’s rescue plan in 2008 received much criticism as a bailout for the banks. The one of 2020 was to rescue everything.
The Fed, along with the Treasury, most likely saved the nation from a devastating financial crisis that would have made it more difficult for companies to survive, recover and rehire. Many of the programs have ended or are nearing completion, and the markets are doing well.
The Fed bailout reinforces the urgency to safeguard the system. Central bankers set a precedent by saving previously untouched markets, increasing the likelihood of investors taking risks by assuming the central bank will always step in if things get too bad.
Translation: Susana Manghi
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