Laissez-Faire Economics during Recession
Throughout modern history, the state traditionally attempts to act as a vehicle to soften the blows during recessions and create a healthier capitalistic society with smaller troughs of its economic cycle. Recent events have yielded unprecedented government action, largely provided by the Federal Reserve. While there are currently endless challenges, it appears that if one were to short the market during this recession, they would be betting against the Fed. The quote “Desperate times call for desperate measures”, originating from the Greek physician Hippocrates, gains momentum during these hectic times. Stances taken by the Federal Reserve certainly qualify as desperate; some projections of a jaw-dropping $10 trillion worth of federal stimulus draw uncertainties as to the necessary quantity. When quantitative easing, newly proposed “yield curve control”, the Paycheck Protection Program, the Main Street Lending Program, $600 added to every unemployment claim, and direct one-time handouts are awarded, questioning the extent of some of these programs in order to avoid future financial damage is justified.
When examining the power and activity of the Federal Reserve, the first place to assess is its balance sheet. The balance sheet dictates the current financial standing of the bank in terms of assets versus liabilities and equity. In describing the Fed’s balance sheet, Bloomberg testified, “This would be more than double the peak that the Fed's balance sheet reached after the 2008-09 financial crisis”. The following graph best depicts the activity of the Federal Reserve since The Great Recession:
Fiscal Stimulus reached its peak at just over $2Trillion to combat the financial crisis in 2008. Beginning in September 2019, the Fed’s balance sheet began to increase, likely due to quantitative easing enacted to fight inflation. The power of the central bank has nearly quadrupled since 2008, with a balance sheet totaling just over $7 trillion. While this increase has taken place over the last 12 years, it increased by 75% in recent weeks. Such substantial measures leave many wondering if the extent of the Fed’s actions is necessary. While the country is experiencing record unemployment, some question if the central bank’s response is proportionate, or overreached. While some are unconcerned, such high-level presence by a regulating entity greatly reduces laissez-faire economics. On the surface, this seems pleasant because laissez-faire economics currently means a recession. At a closer look, however, most economists know that suspending free market economics almost entirely is not sustainable, and unhealthy in the long term. Studies have shown that the Paycheck Protection Program was incredibly shortcoming. Prolonged suspension of free market economics simply makes today’s problems an even greater problem tomorrow.
The massive increase in assets comes from a few primary programs: quantitative easing/ monetary policy, Paycheck Protection Program, Main Street Lending, additional $600 to every unemployment claim, one-time direct monetary handouts, and there are sure to be more proposals in the future. Quantitative easing and monetary policy have long been used as a tool by the Federal Reserve to control the money supply and keep markets stable. Monetary policy deals with the Federal Open Market Committee’s control of interest rates and the quantity of treasury bonds on the market. The newest proposal of monetary policy is an alternative to quantitative easing called “yield curve control”. Yield curve control refers to the government fixing the appropriate number of treasury bonds to shape the yield curve, a major economic indicator. This would place maximums and minimums on interest rates. Some reputable economists, such as Ben Bernanke and Janet Yellen, have recommended that the Fed consider yield curve control, should short term rates fall to zero. Yield curve control poses one potential threat to the United States: an even faster-growing balance sheet. The Bank of Japan enacted yield curve control in 2016, the only large central bank to do so in recent history. Rapid balance sheet expansion followed, greatly outpacing other major central banks. This may be unsustainable, given the rate at which the Fed is currently growing.
Why does it matter if the Federal Reserve grows its assets exponentially? The Federal Reserve was designed to primarily act as a stabilizer to the economy. It should not act as the center of operations, stimulus, and growth to an economy. The Fed has grown tremendously since inception with its original intent, “Carter Glass, one of its founders, always insisted it was not a central bank. Its main business was the discounting of commercial paper and acceptances governed by the real bills doctrine subject to standard rule” (Meltzer, Allen). Many of the founders of the bank intended it to play a small role in society. By the end of Allan Meltzer’s work on A History of the Federal Reserve, the bank became broadly more powerful than originally intended. In a developing society, this may be necessary, however it is important to note that prior to the 1980s, banks were not even required to adopt the Federal Reserve’s reserve requirement. An overly strong Fed inhibits the ability of the free market, and with that eliminates incentives. While fiscal stimulus is certainly needed during a global pandemic, the extent to which it is implemented is justly questioned, especially when it comes in the form of insurmountable debt. Inevitably, there should be large tax raises in the future to compensate for the massive issuance of treasury bonds. While dreaded and at times devastating, recessions are natural events that must happen in a proper capitalist society. Recessions in theory allow newer, better qualified managers to take over businesses and allow capitalism to make its natural advances. Too much action by the Fed disincentivizes businesses and at times individuals. For example, if businesses and individuals know they will be the recipient of federal aid, there is little incentive to produce at all. In future stimulus talks, the country may want to consider employing people to ensure that only people that are in need of stimulus receive stimulus. Millions of Americans are making more money than when they were working.
The Federal Reserve has never acted to the extent of which it is currently operating. The array of Federally sponsored programs, much of which are conducted using borrowed money, is unprecedented. In some way, every American will be affected by these programs. Many of them are working and have jump started the economy. On the other hand, these programs come at a great cost to our future in that tripling the Fed’s balance sheet after the 2008 recession may not be necessary. While it is important to keep the economic crisis under control, suspending free market economics for an extended period may not be the answer.
Works Cited:
Meltzer, Allan H.. A History of the Federal Reserve, Volume 2, Book 1, 1951-1969. Ukraine, University of Chicago Press, 2010.
