Financial stimulus: monetary bazooka misses its target

Central bank action to prevent liquidity from drying up has failed to reverse the market rout.

US Federal Reserve chairman Jerome Powell has failed to put a floor under markets © Getty

“Get ready for the Covid-19 global recession”, says Larry Elliott in The Guardian. With mass gatherings prohibited, borders closing and countries in lockdown the world economy is in line for a deep slump. On Sunday central banks in Europe, Asia and North America announced coordinated action to prevent liquidity from drying up. America’s Federal Reserve slashed interest rates to nearly zero and pledged $700bn in new asset purchases (with printed money). 

A terrifying plunge 

These measures failed to reverse the market rout. On Monday both the Dow Jones and S&P 500 recorded their biggest one-day falls in over 30 years, as both tumbled more than 12% in a single day. The VIX measure of market volatility, the so-called “fear gauge”, topped a record set in 2008 when it closed on Monday. 

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“The S&P 500 hit a record high just over one month ago,” notes Courtenay Brown on Axios. The index has since tumbled 29% and entered a bear market. The FTSE 100 and Eurostoxx 600 indices are both down one-third since the start of the year.

“Most panics are the result of a pre-existing mania,” says Jeremy Warner in The Daily Telegraph, but “this one is essentially an act of God”. Compounding the virus fallout has been investors’ concern about a series of ignorant statements from Donald Trump. The Fed’s swift action, however, has probably prevented a 1929-style rout on Wall Street. “Mr Trump owes more thanks than he knows to the Fed chairman, Jay Powell.”

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Money cannot cure a pandemic

But the flood of easy money has yet to put a floor under markets, says Gillian Tett in the Financial Times. US stocks have spent a decade like a drug addict “hooked on monetary heroin”; every wobble has been met with a “new monetary fix”. Now the financial morphine has ceased to work. 

That is because this is not a repeat of the financial crisis, says Niall Ferguson in The Sunday Times. It is a “public health emergency with financial symptoms”. To expect monetary and fiscal stimulus to halt a pandemic’s fallout is akin to tackling the collapse of Lehman Brothers with a “quarantine of Wall Street”. This pandemic is both a demand and a supply shock, says Elliot; monetary policy only tends to work on the former kind. Cheaper credit won’t make people go out and spend when the shops are closed and supply chains buckle. Paul Dales of Capital Economics says that the second-quarter hit to UK GDP could be 5%. What’s more, having “imposed bans and restrictions, governments and private-sector bodies will be cautious about removing them”. Expect a slow recovery. “[Extreme]situations create opportunities,” says John Authers on Bloomberg. But they “also offer the chance to lose ungodly sums of money”. The human impulse to “do something – anything” in a crisis is strong, but amid such volatility and uncertainty putting money into the market now is little more than gambling. In the words of legendary US investor Jack Bogle: “Don’t do something, stand there!”

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