The Fed is Lender of Last Resort—For Main Street, Everyone – March 25, 2020
The Federal Reserve was created in 1913 in response to the Panic of 1907.
- It was birthed to step into the gap when banks “get scared” and stop lending to businesses, consumers, and each other. In other words, the Fed steps in to support credit markets with cash when no one else will.
- In many cases, the Fed lends at a penalty rate and requires collateral, with the goal of preventing an even deeper economic downturn.
The Fed has announced many programs to support the Treasury market, commercial paper market, money market funds, and more, including Monday’s announcement of almost unlimited purchases of Treasury bonds and mortgage-backed securities.
Important: the Fed also said it will soon begin a Main Street Business Lending Program to support lending to eligible small- and medium-sized businesses.
- It’s designed to limit layoffs.
- Jobless claims out this Thursday appear likely to hit a record.
The Fed wants to ensure that businesses which are being hammered by social distancing and forced-government closures have the funds to survive the downturn, enabling them to reopen and rehire when the health crisis subsides.
- It also wants to set the stage for what it hopes is a vigorous recovery.
Investor’s corner
For those whose belief in free markets is strong, government intervention is usually unwelcome.
However, today’s circumstances are unprecedented. The government is encouraging social distancing and forced closures. Support from the Fed and the federal government seems reasonable as we await an economic turnaround and a decline in new COVID-19 cases.
Created 2020-03-25 14:42:21