Three years ago, former Fed Chair Janet Yellen confirmed the imminence of a financial crisis by stating that:
"Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will."
This comment compares to a similar bold prediction by Ben Bernanke, who in 2014 predicted during one of his $250,000/hour speeches that "rates would not normalize during my lifetime."
But, with a global financial crisis now upon us (and in many ways it is more aggressive than that of 2008/9) and with rates at record lows once again as any attempt at normalization from Bernanke's past mistakes has been met with market uproar, the two former 'maestros' are out with an op-ed, demanding current 'maestro' Jay Powell use his practically unlimited powers to save the world.
Reviving crisis-era programs is a first step but the central bank may need to buy corporate bonds, they begin in their FT op-ed strawman:
Central banks, like the US Federal Reserve, also have a useful role to play. Some of the actions recently announced by the Fed, including cutting the short-term policy rate nearly to zero and preparing to buy at least $700bn in Treasury debt and mortgage-backed securities, are superficially similar to those taken by monetary policymakers during the 2008 financial crisis.
However, the dastardly duo warns:
...the underlying challenges today are quite different.
Now, the problem is not originating from financial markets: they are only reflecting underlying concerns about the potential damage caused by the coronavirus pandemic, which of course monetary policy cannot influence.
And Yellen and Bernanke warn, the Fed and other policymakers face an even bigger challenge.
They must ensure that the economic damage from the pandemic is not long-lasting. Ideally, when the effects of the virus pass, people will go back to work, to school, to the shops, and the economy will return to normal. In that scenario, the recession may be deep, but at least it will have been short.
"Long-lasting" like the ZIRP/QE policy's impact on growth? Anyway, the pair of pundits has a solution for Jay Powell:
However, there is more that the central bank should consider doing as it helps Congress reduce the long-run effects of the downturn.
There are other tools the Fed could use to get funds into the credit stream, such as a facility (technically known as a repo facility) that could provide cash to a wider range of lenders than the discount window, against various forms of collateral.
Which it has already done with unlimited repo, a new CPFF, and now PDCF, but Yellen and Bernanke have an ace up their sleeve...
The Fed could ask Congress for the authority to buy limited amounts of investment-grade corporate debt. Most central banks already have this power, and the European Central Bank and the Bank of England regularly use it. The Fed’s intervention could help restart that part of the corporate debt market, which is under significant stress. Such a programme would have to be carefully calibrated to minimise the credit risk taken by the Fed while still providing needed liquidity to an essential market.
Brilliant - because that worked so well to improve the fortunes of Europe?
And finally, remember just a month ago, Janet Yellen suggested that The Fed should buy stocks in the next crisis...
Yeah, that worked out really well for The Bank of Japan which now faces trillions in losses on its insane ETF buying program... which has crushed the share price of the central bank...
So, do we go full-Einsteinian-madness - repeating the mistakes (that have not worked at all) of Japan and Europe and expect a different result... or is now the time to bite the bullet, embrace the creative destruction and prepare for a new world?