Have the Monetary and Fiscal Responses to COVID-19 Gone Too Far?

By Adrian Pedroza

The arrival of the COVID-19 pandemic has unveiled a side of the Fed—and Congress—unseen before. In addition to two stimulus packages of 8.3 billion dollars and 192 billion dollars, Congress has passed the Cares Act, which has an estimated cost of 2.15 trillion dollars; these funds completely tower over the controversial 700 billion dollar TARP program of 2008. The approval of another bill by the House of Representatives meant to increase spending by an additional 3 trillion dollars highlights that Congress is simply not the same entity it was 12 years ago; times have changed, and both fiscal and monetary policy have clearly changed with it.

We can see this strong sense of ambition in the swift actions of the Fed, which has already established nine main facilities to increase liquidity and ensure the flow of credit in our economy: the Commercial Paper Funding Facility, Main Street Lending Program, Primary Dealer Credit Facility, Money Market Mutual Fund Liquidity Facility, Municipal Liquidity Facility, Paycheck Protection Program Liquidity Facility, Primary Market Corporate Credit Facility, Secondary Market Corporate Credit Facility, and the Term Asset-Backed Securities Loan Facility. With five of the facilities having a spending limit total of just under two trillion dollars and the remaining four facilities having no spending limit, it is clear that the Fed is willing to do anything it possibly can to combat the effects of the current pandemic on our economy. Obviously, these actions do not come without consequences, as the effectiveness of the actions of the Fed and Congress is still unclear. However, we know that whether we have spent too much or too little, each dollar spent should be deployed in a way that maximizes its positive effect on the people of our country and those around the world. Thus, it is important to take a closer look at each of these nine facilities and determine if each one truly helps the Fed move toward its goal of aiding the underlying economy or if certain sums of money could be better utilized if allocated differently. The majority of these facilities (e.g. the Commercial Paper Funding Facility, the Money Market Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility, and the Municipal Liquidity Facility) appear to be quite essential in maintaining the necessary liquidity to allow the proper functioning of credit markets, which benefits our real economy. Furthermore, without the Paycheck Protection Program Liquidity Facility and the Main Street Lending Program, many small businesses would not be able to afford payroll costs and would thus be forced to lay off employees.

Yet, the implementation of the Primary and Secondary Market Corporate Credit Facilities has raised significant concerns. The reasoning behind the establishment of these facilities is not without merit (to protect companies under stress from going bankrupt and laying off employees), but the effectiveness of each dollar spent through these facilities is nonetheless quite questionable. For instance, taking a look at the top fifteen companies which have had their corporate debt bought by the Fed, we notice that Apple and Microsoft hold the number five and eleven positions, respectively, on this list. Both of these companies currently have market capitalizations that surpass 1.5 trillion dollars (with Apple’s market capitalization surpassing 1.8 trillion dollars). For comparison, only eight other countries have a nominal GDP greater than 1.8 trillion dollars. With this incredible market capitalization and enormous sum of cash, Apple appears to have one of the safest credit markets in the world; yet, it is the fifth largest beneficiary of the Fed’s Secondary Market Corporate Credit Facility. This naturally leads us to question the effectiveness of this facility and if funds are truly benefitting the real economy to their full potential. The only clear benefit in buying corporate debt from companies like Apple and Microsoft is to prop up equity prices. As a result, we have to ask ourselves, is this really how we want our money to be spent with the current disastrous state of our economy and unemployment at its highest levels since the Great Depression?

With unlimited resources, it would be easy to support anything that can have even the slightest positive effect on anybody. However, living in a world of scarcity and limited resources results in trade-offs, which means each dollar that is spent today by the Fed and Congress holds consequences that will be felt for years to come. If the benefit of each dollar outweighs its cost, both now and in the future, we can classify the choice to spend it as a success. Yet, if the total cost of a dollar spent outweighs its benefits, then it is important to act quickly to limit this downside through a reallocation of funds.

In general, the fiscal and monetary spending today has plenty of direct benefits to our real economy. However, there are also longer-term, less obvious costs to this spending, which must be weighed when considering how much and where to allocate valuable funds. If too much stimulus leads to higher than expected inflation, the Fed may be forced to eventually hike up interest rates before expected, which would have an adverse effect on financial markets and our economy. Furthermore, as a result of the Fed’s robust set of plans to support the economy, we have seen equities bounce back from their lows at incredible, rapid rates, creating a large disconnect between the stock market and the real economy. In addition, a “whopping 84 percent of all stocks owned by Americans belong to the wealthiest 10 percent of households.” Thus, in driving up equity prices, the wealth inequality gap already present in our nation only continues to grow, an unintended consequence of the actions of the Fed and Congress. Finally, a free market economy rewards firms that produce goods and services currently in demand by consumers while pushing out firms that face falling demand by consumers, leading to a more efficient marketplace. While a free market on its own is far from perfect, the robust spending by the Fed may raise the question of whether firms producing goods and services no longer needed or desired in society will artificially remain in our economy solely based on the Fed’s backstop on the economy, creating a drag in the economy and a loss of efficiency in the spending of the Fed. Thus, as the COVID-19 pandemic continues to unveil its wrath, the Fed must continuously critique and debate its own choices to ensure their effects directly align with their original intentions of improving our underlying economy.

Now, rather than argue repeatedly and to no avail over how much spending by the Fed and Congress is the “correct” amount, it is necessary to focus more on allocating these funds in the most efficient manner as we attempt to dampen the dire effects of the current pandemic on our real economy.