With this week’s Federal Reserve initiatives, and today’s signing into law of the coronavirus rescue package, we now have at least the first wave of US monetary and fiscal responses in place.
The biggest risk at this point is that it won’t stop. We remember all too well how the 2008 crisis era polices, especially ultralow rate policy, persisted years after the crisis was over. And that in turn left our financial system leveraged and our economy in a weakened state when the plague hit. So we not only have a health crisis but a financial crisis on top of it.
At least some of the risk in risky assets has to be realized. There have to be at least some bankruptcies, especially in the corporate sector that borrowed to buy back stock instead of provisioning for a rainy day.
If all risk capital is lost, the response has not been adequate; but if none of it is lost, it’s gone too far.
The consequence of the latter would be a permanent loss in living standards … if debt-fueled risk never loses, and capital can be thrown at any project without consequence, the capital markets lose their ability to allocate capital to its most productive uses. What brought our civilization its historic prosperity will have been trashed.