June 29, 2020
Sannoy Das, Harvard Law School
The Just Money roundtable was convened to analyze policy responses, emerging mostly from monetary authorities, to the economic dislocations that occurred or became imminent as the coronavirus crisis hit every corner of the globe. Most of our contributions focused on the responses by the Fed in the United States – and while this is obviously limiting in one sense, in another we gained from zooming in on the actions and authority of that agency. The institutional role of the Fed in the American economy evolved in response to the 2008 financial crisis, and does so again here. The deployment of the tools fashioned in that crisis offers insight into the role that monetary authorities can, and should, play in the governance of the economy. The contributions here generally underscore the influential, even outsize, role that the Fed plays in shaping the course of the American economy. In fact, given the position of the dollar, the Fed’s interventions will surely have significant impact on other economies too, and will condition the response of other monetary and fiscal authorities.
Sixteen contributions were published between March and May – as America moved from the earliest days of scattered local lockdowns, to deeper and more widespread orders, to down shutters. These posts were written in the backdrop of a rapidly evolving context and speak to a wide range of questions. In this brief summary, I am going to attempt to distil a set of fundamental concerns from otherwise very divergent contributions. Naturally, I cannot capture all the arguments that all our authors made, and I try, post hoc, to draw connections between contributions that may be somewhat tenuous. Nevertheless, I hope this summary offers some helpful guidance on reading the roundtable. The entire roundtable – with a serial presentation of the contributions – is available here.
Several of our contributors ask a fundamental political question – as the Fed intervenes to protect the financial system, and the Congress passes a trillion-dollar relief package – to whom do the benefits of these interventions flow? That distributional question sits at the heart of the Fed’s legitimacy and political identity, particularly as the COVID-19 crisis threatens to worsen escalating inequality. Duncan Kennedy suggests that the Fed should buy up debt that is secured by mortgages over low income housing properties, conditioning this bailout on the landlord extending protection to tenants. Similarly challenging the Fed’s focus on shoring up banks, Gerald Epstein proposes that the Fed inject liquidity into municipal governments by accepting new forms of local and state bonds – paper issued on the basis of local human capital rather than tax revenue. Certainly, both these interventions would fall within the scope of the Fed’s powers, but they involve going beyond the role that economists conventionally assign to a central bank. To be sure, in 2008, the Fed acted in ways that went far beyond what conventional wisdom would have admitted; donning the avatar of Oscar Perry Abello’s ‘Brave New Fed.’ This is precisely the argument now – that any constraint on the Fed acting for benefit of the American working class is ideologically constructed. In the broader context of how politics responds to the pandemic, J.K. Moudud underscores this point about ideology, arguing that we must look beyond the ‘market fundamentalist’ obsession with shoring up stock markets and economic growth alone in response to a crisis. By contrast, Dan Awrey mounts something of a defense for the Fed’s conventional intervention to back up banks and financial institutions by stabilizing the money market. To be sure, Awrey’s point is not to deny the importance of monetary system reform for the benefit of American households, but merely that the Fed’s ‘subsidies’ for Wall Street are not entirely without social purpose.
Fundamental to Keynes’s challenge to nineteenth century economic wisdom was the insight that workers don’t bargain for a real wage – they bargain for the money wage. If what matters for a stable and equitable economy is money in the hands of people, Katharina Pistor and Robert Hockett, in slightly different ways, suggest that rethinking how the dollar circulates as currency can serve that purpose. Pistor, borrowing from the history of cooperative monies, suggests that the central bank should issue a digital currency – ‘Free Dollars’ – that depreciate over time so that recipients are incentivized to spend. Hockett, similarly, suggests utilizing the existing digital architecture of the Treasury to create digital ‘treasury dollars’ that people can spend from their treasury direct wallets, and which would be convertible to Fed dollars. Despite important differences between these two proposals, they have two insights in common. First, they agree that money is ‘created’ by the banking system because that system is backed by the sovereign. Accordingly, new ways to create money for the benefit of the people are always within sovereign prerogative. Second, and as I noted above in respect to other posts, they reiterate that our assumptions about the Fed’s role being limited to managing the ‘financial’ system are ultimately tenuous. Leah Downey sharpens the focus on this point by reminding us of how the abiding divide between monetary and fiscal matters serves to blunt the possibility of transformative political interventions in times of crisis. And Saule Omarova notes that once the economy comes to be sustained on the basis of monetary and fiscal interventions, there is good reason to reconsider the possibility of a developmental role for the State by instituting a national investment authority.
Enduring questions about the vulnerability of a financial system in uncertain times appear in three contributions: one by Nadav Orian Peer and two by Carolyn Sissoko. They address matters of risk assumption by financial market participants and the regulation of that risk by the Fed. Orian Peer addresses the rise in transactions in the ‘sponsored repo market,’ different from the tripartite repo market, where participants are better regulated by the Dodd Frank Act and Basel III norms. The turn to sponsored repo transactions, a case of regulatory arbitrage (which Orian Peer, with literary flourish, describes as an existential feature of the human condition), threatens the stability of the financial system by undermining the regime of regulatory oversight over repo transactions that followed the 2008 crisis. More concerning is how this ‘sponsored repo market’, now unwittingly supported by the Fed, would affect its future response as a financial crisis looms large following the pandemic. Carolyn Sissoko points to the more general volatility of a financial system with high volumes of repo transactions. The nature of the repo market makes it inevitable that any decline in the value of assets that are collateral for repo borrowing (the inevitable outcome of some negative sentiment in the economy) will lead to margin calls from repo lenders, triggering a ‘fire sale’ of assets, all the way down to the otherwise safe Treasury bonds. As this played out in March, the Fed intervened to stabilize Treasury bonds, but with negative sentiment always just around the corner during a pandemic, the dark clouds of a crisis gather overhead. In another contribution, Sissoko turns to a more fundamental question of risk and bailouts under capitalism. State capacity under capitalism exists because the private sector is characterized as risk bearing. Bailouts threaten that underlying compact and must for those reasons (rather than the more ubiquitous ‘moral hazard’ arguments) be considered with caution.
Two contributions by J. van’t Klooster and E. Saeidinezhad, in very different ways, offer some perspective on the global context for the Fed’s interventions. Saeidinezhad explains how the Fed’s re-establishment of central bank swap lines with five other major central banks was designed to ensure stability in the ‘Eurodollar’ market (foreign deposits denominated in US dollars), when instability became inevitable with the disruption to global trade and supply chains. Thus, paradoxically (or not), the risk emanating from a disruption of the chained global ‘real’ economy could only be managed by the further globalization of money. Van’t Klooster offers a brief comparative insight into the Fed’s willingness to inject liquidity against that of the European Bank. Their point is to demonstrate that while central bankers have committed to “do whatever it takes” to keep the wheels of the financial system well-oiled, they are simultaneously concerned about managing the central bank’s exposure (more so, in Europe). Central bankers guard against risks of ‘technical insolvency’ in order to retain their regulatory authority; committing to large scale quantitative easing requires bankers to overcome their fear of insolvency. Unlike those who might dismiss this view of insolvency risk as pure ideology, Van’t Klooster takes this psychological condition seriously, and argues that it accordingly makes sense for the Congress to earmark a part of the relief package for the Fed itself.
Finally, while many of our contributions are invested in the thickets of monetary policy, two pieces by James McAndrews help us think more generally about managing the economy in the midst of a crisis. How we evaluate effective economic policy depends on our basic sense of how the world (the economy) works. Thus, McAndrews suggests that if we diagnose the economy as a set of circular flows, and the pandemic causes leakages in particular streams, then policy prescriptions designed to fix one set of flows can generate imbalances elsewhere. Therefore, monetary policy fixes – designed to increase available credit – must be applied alongside interventions that provide income support, increase flexibility of repayment on existing debts, and enable workers to steadily rejoin the economy. Along similar lines, in his second contribution, he reminds us that our current crisis did not arise on account of a particular problem with the money market. Accordingly, standard tools of monetary policy will likely be insufficient, and attention must be paid to support firms through the crisis. Policy must evaluate which firms to prioritize for support, and how best to support them.
Following leads from the contributions to the Roundtable, we’re left with many ways to think about monetary (and fiscal) interventions in a crisis. The conventions by which we conceptualize and implement these interventions may be suspect (Downey, Omarova) and ideologically constructed (Moudud). They include our notions of what the “economy” is (McAndrews), and influence our judgment about the distributional stakes (Kennedy, Epstein, Abello, Awrey). Indeed, a distributional question is subtly at play in how we think about all matters of finance – how currency circulates (Pistor, Hockett), how risk and profit are engineered at the level of high finance (Orian Peer, Sissoki), and how monetary dynamics are tied together globally (van’t Klooster, Saeidinezhad). I might close with a word of caution: our view of the present is often fragile. In the years to come, how we evaluate this period of crisis might be well beyond our grasp at the moment.