A year or so ago, governments around the world started telling people not to associate with more than a few people, stay home and things will be better. The office workers of the world adjusted and many people work from home which was good for the companies, but not gathering meant wide parts of the economy went to a standstill and they are still recovering. Governments have the ability to do many things, most of the time the average person does not know or see, but sometimes Governments can use their influence and ability to print money to do the right thing.
In an article by Jeanna Smailek of the New York Times New Service outlined what the Federal Reserve did to ensure the financial economy continued or credit was not the issue. Generally, if there is no credit in the system, the system essentially shuts down.
In March of 2020, the US Federal Reserve saw that there was a panic to sell stocks and bonds (all the indexes were down), but they were sitting in cash. On a regular day, Treasury bills or government securities are the safest asset in the world, buyers were not buying or were scarce. Since 2008, the market had not broken down so badly.
On March 15, Lorie Logan who oversees the Federal Reserve’s Bank of New York asset portfolio, told the Board Meeting of the entire Federal Reserve at a meeting in Washington, the New York Fed had been buying Treasury’s to soothe the market but it was not enough. To fix things, they had to act fast and do more, a lot more.
In March, the policy makers were forced to cross boundaries, break precedents and make new uses of the US government’s vast powers to save the domestic markets, keep cash flowing abroad and prevent a full-blown financial crisis from compounding a public health tragedy. The rescue plan worked.
How it Started
In Feb 21, 2020, Italy announced a lockdown of its economy, investors sold and went to safe investments such as US Treasury. Demand for corporate bonds disappeared.
On March 3, 2020 the Fed cut interest rates to 1%,
In the second week of March, investors were selling US Treasuries to be in cash.
On March 15, 2020 the Fed announced it would buy corporate bonds and slash rates. By March 21, Federal Chair Jerome Powell had told Andreas Lehnert, director of the Fed’s stability division to prepare emergency lending programs (which had been used in 2008) and Treasury Secretary Steven Mnuchin signed off on. The Fed promised to buy an unlimited amount of Treasury debt and to purchase commercial mortgage backed securities. On March 23, the Fed went a step further and buy corporate debt and help loans get to mid sized businesses.
The dash for cash stopped and people started buying US Treasuries. In a few months stocks rose in value and 6 months later they were at new highs. The government still owns bonds what should they do with it?
Linking to dividend paying stocks, we live in an interconnected system where all aspects of life are connected on the macro scale. Governments play a role and are needed when there are problems in the system and the whole system, private interests consider them themselves first which does not solve the problem, governments are needed for stability. When there is stability, companies which make profits year over year do wonders for the economy.
There are more questions than answers, till the next time – to raising questions.