By Owen Ullmann
Brave health-care workers treating the sick have been lauded as heroes during the coronavirus crisis, as they should be for their dedication and willingness to put their own safety at risk.
Yet another group of heroes that deserves our gratitude is the leadership of the Federal Reserve, which has taken extraordinary steps to prevent the global economy from crashing into irreversible catastrophe as business around the world grinds to a virtual halt.
The U.S. central bank, which already has slashed its bank lending rate to zero and injected billions into the U.S. economy to keep it functioning, said Monday it would do whatever it takes to keep the system from collapsing. That means providing emergency funds to support whoever needs them, from private business to governments.
“It has become clear that our economy will face severe disruptions,” the Fed said in obvious understatement early Monday morning. “Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”
It’s understandable that most Americans may not appreciate what the Fed is doing since its activities are arcane to most of us other than financial players, scholars and students. But here’s the bottom line to help you understand the critical role played by the central bank:
The Fed can create unlimited amounts of dollars – that’s right, trillions, if required – to ensure that banks have enough funds to make emergency loans to businesses large and small, as well as state and local governments that are running out of funds as they deal with the crisis.
It is not an understatement to say that without the swift responses from the Fed on a nearly daily basis, we would be watching a chain reaction of bankruptcies and unemployment that would not only make the Great Recession of 2008-09 look mild, but would exceed the depths of the Great Depression of the 1930s.
We already are headed for the biggest drop in business activity and highest level of unemployment on record. The Fed’s moves are designed to provide a financial lifeline and cushion to allow businesses to stay intact and rebound once this health crisis passes.
As an independent agency, the Fed can move immediately and with creativity without waiting for approval from either President Trump, who has been slow to respond to the burgeoning crisis, or Congress, which is still negotiating a massive relief bill to help shuttered businesses and laid-off workers.
The bank’s actions only have to be approved by the Fed’s seven-member governing board in Washington (there are currently two vacancies) and the presidents of the 12 regional Federal Reserve Banks spread across the country.
Orchestrating the emergency response is low-key Fed Chairman Jerome “Jay” Powell, a Republican who was named by Trump but has been a continual target of unprecedented and unwarranted presidential attacks. Before the coronavirus crisis erupted, Trump complained that Powell wasn’t doing enough to stimulate the economy, obviously to ensure the best of times when voters decide whether to re-elect the president this fall.
Powell didn’t take the bait by refusing to aid the economy out of personal spite. His leadership of the Fed has won near universal praise across the political spectrum in Congress and among the nation’s financial and business leaders.
“The Fed has pulled out all the stops to insure that credit keeps flowing to Main Street households and firms,” Powell’s predecessor, Janet Yellen, a Democrat named by President Barack Obama, said in an email. “Its actions have been bold and exceptionally swift to deal with this economic and financial emergency.”
Using its broad legal mandate to maintain a healthy economy, Powell and his associates are taking novel steps to provide loans to whoever may need them – a departure from its traditional lending to banks.
In past decades, the Fed has been reluctant to create too many dollars for fear of creating high inflation, as occurred in the 1970s in the U.S. and more recently by foreign governments that allowed their central banks to create unlimited amounts of their currencies to cover domestic debts.
Inflation is hardly a problem today; rather, the fear of deflation is the larger concern. And demand for dollars has never been greater around the globe. So creation of trillions of new dollars to keep the global economy solvent during this crisis is essential.
We can only hope that this unparalleled social and economic disruption is short-lived, and normalcy will return in the coming months. The Fed, which made bone-headed moves in the 1930s that deepened and prolonged the depression, is clearly avoiding that mistake today and trying its best to see us through these scary times.
Whether Trump appreciates it or not, the Fed is working diligently to keep him from becoming the Herbert Hoover of the 21st Century. We know how that presidency ended.
Former USA TODAY editor Owen Ullmann, is currently executive editor of The International Economy magazine. He has covered the Fed for more than 40 years.