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Comment by JumpCrisscross | Hacker News Reader

> We are in uncharted waters

Yes, we are. But we come with navigational guides.

Quantitative easing was born out of Bernanke's deep study of the Great Depression, where exogenous events prompted a liquidity crisis that kept causing pain long after its cause had subsided.

The demand destruction we're seeing today, as a result of the novel coronavirus, is unprecedented in the modern era. We don't want to spend decades after the infection has passed rebuilding productive capital destroyed for lack of liquidity. That's what these measures aim to prevent.

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> Quantitative easing was born out of Bernanke's deep study of the Great Depression

But the Great Depression was caused by a financial crisis, that led to a ‘real’ crisis. This is the opposite, a real crisis that will lead to a financial one.

And during the Great Depression, people could still have worked - if there were any jobs. This is not true now. People simply can’t work.

It’s all very well being able to get easy money, but if you can’t get any workers, you still can’t start a business.

A lot of money chasing fewer goods can only have one consequence in the long term.

You write in very final terms: simply can’t; that lead to a financial one (as though the financial crisis isn’t real).

But seem to be overlooking @JumpCrisscross’ main thrust of: long after its cause had subsided ... after the infection has passed.

It seems reasonable to predict the current restrictions won’t exist in perpetuity.

> It seems reasonable to predict the current restrictions won’t exist in perpetuity.

And even if they do linger on for a long time (years) then businesses will also need sufficient liquidity to adapt to a new normal. Startups created to fulfill any new or newly important needs.

Additionally, the Fed is sticking to its mission: support the currency within a reasonable inflation band while also supporting a target unemployment rate. Debasing the currency right now is exactly the right thing to do. Later, the Fed will unwind these supports as it did long after the great recession ended.

The Fed only unwound about $600B of $5T in support they provided before this event occurred (post GFC to pre pandemic response). It’s in the same FRED citation in this subthread [1].

I don’t think there’s any merit to the idea the Fed will be able to unwind this support in the future, if that’s as far as they got in one of the longest expansionary periods in history.

EDIT: /u/adventured has an excellent comment [2] down thread you must read that explains the situation succintly; TLDR The Fed is incinerating 1-3% of total wealth (through devaluation) to keep the economy pilot light on until we can start the economic engine back up, monetary policy be damned. Whether these efforts can be "unwound" seems to be immaterial.

[1] https://fred.stlouisfed.org/series/WALCL

[2] https://news.ycombinator.com/item?id=22827276

The Fed did end the short-term targeted lending programs once markets stabilized and alternative financing become more available. Not really enough to dent the balance sheet though due to the size of the govt. bond and MBS purchases from QE.

It doesn't actually need to unwind absolutely (though if monetary policy conditions allow/demand it, it could), unwinding in effect can come just through aggregate economic growth.

> monetary policy be damned.

No, this is monetary policy, aimed directly at what the Fed is chartered to aim monetary policy at.

> Later, the Fed will unwind these supports as it did long after the great recession ended.

That was the idea at least.

The Fed never unwound, at least beyond an initial and failed attempt.

When the Fed started unwinding a little over a year ago, they had to suddenly stop when markets tanked—hard. After the Fed ceased, stability returned.

I'm not sure there will ever be an unwinding, at least in the traditional sense.

Topping it off, starting last September, the Fed began emergency "not-QE" liquidity injections, which have unexpectedly grown over time.

And now, this black swan event. Nobody knows what's going on.

>'Topping it off, starting last September, the Fed began emergency "not-QE" liquidity injections, which have unexpectedly grown over time.'

What were those "not-QE" liquidity injections exactly? What other lever were they pushing on a year ago?

The Fed pumped /tons/ of money into the repo market.

But the Fed never unwound after the great recession...

Yes, agree 100%. Urgently necessary.

I imagine there's a lot of 'invisible supply destruction' as well, as all those businesses that have let go around 17 million people over the past three weeks[a] are shutting down entire groups and divisions, canceling investment plans, walking away from leases, etc. Not pretty.

[a] https://www.wsj.com/articles/u-s-surge-in-unemployment-claim...

> shutting down entire groups and divisions, canceling investment plans, walking away from leases, etc.

Agree completely.

There's been this naive bit of internet "wisdom" running about assuming plants and planes are the only assets in the world. That after all is said and done, and bankruptcies re-assign that capital, the world can continue as before, with ownership only shuffled.

That isn't how modern economies work. Tremendous capital is in the intangible nature of firms. Apple, Tesla, SpaceX and your neighborhood restaurant are worth less in parts than as a whole.

> Apple, Tesla, SpaceX and your neighborhood restaurant are worth less in parts than as a whole.

Well, of course they are. If they weren’t, they could make more money by liquidating themselves, which means they most likely would liquidate themselves.

Are they? Do you have some magical economic clairvoyance about asset valuation?

See, the thing about a market economy is that the value of assets is difficult to ascertain but can be "discovered" through the actions of market participants. Sometimes, a whole bunch of assets are tied up in a company that seems to be using them well enough, and might even be generating a profit (on paper), but in fact those assets could be used even more profitably in some other productive capacity.

Note that this doesn't restrict assets to PPE (property, plant and equipment). I'm pretty sure anyone who has ever been an employee can attest that human capital can be just as unproductively employed as physical capital, but still show a profit on paper.

So no, you can't make some blanket statement that all companies are worth more than the sum of their parts. Some might be, but I believe the main reason we are a capitalist society is because allowing markets to freely discover the prices of assets results in a much more productive allocation of capital than the alternatives.

Damn that was absolutely beautiful

In fewer words, let the invisible hand of the market conduct economic darwinism and let the chips fall where they may.

I would agree with that - except that would also cause collateral damage to people's livelihoods.

if the gov't bailout is more a societal bailout - good unemployment benefits, good socialized healthcare, and effective tax collection of income - then they won't need to do any corporate bail outs, or inject liquidity.

The fact that loans can easily be had, means that a company's investment hurdle rate is artificially lowered. And companies take more risks. I believe japan's lost decade is a prime example, and the bank of japan has held all the assets as their purchase program failed to bring any real economic prosperity (https://www.reuters.com/article/us-japan-economy-boj/bank-of...). I sincerely hope the USA isn't gonna fall to that.

I think people are picturing chapter 11 bankruptcy, not 7 or 13. The firms stay intact, but the shareholders lose everything and the bond holders come to a new agreement.

What happens if liquidity still isn't there? Can't see people being comfortable with life as normal at 30% unemployment. Seems like leisure industry will be non existent for at least the next year and that will have further consequences.

Navigational guides and models only help in charted territory.

If the liquidity isn't there, the Fed will create money out of nothing and inject liquidity until it is there.

loss of liquidity is a loss of confidence by those holding the wealth/capital.

I think the FEDs doing these injections will distort the price of money in such a way that risky activities would be seen as less risky, and so spirals into further illiquidity when something bad hits the fan (again), and the FEDs will need to inject again.

The businesses failing needs to happen. The capital losses needs to happen. Like a forest fire - new growth can't come if the old capital doesn't die (i.e., those controlling the old capital is constantly being protected from downsides, which this illiquidity represent).

We are not in a period of moderate correction, trimming non-viable deadweight. We are in a mass economic extinction of healthy and successful businesses.

The Fed can inject liquidity, but it falls to Congress to generate demand when the economy cannot. The Fed's best move would be to commit to backing any level of spending passed by Congress and signed by the President.

> What happens if liquidity still isn't there?

Do you mean, what if the economy never recovers?

Then the Fed’s actions will soften the blow. They will have decoupled the spectre of deflation from the underlying destruction. It certainly won’t have caused more harm than would have otherwise occurred.

That said, no democracy survives 30%+ unemployment for long.

"Quantitative easing was born out of Bernanke's deep study of the Great Depression"

QE was born out of the seigniorage, the ability for the FED to now print endless money at no cost. This is a cycle that repeats every 50-100 years for the last 1,000. A governing body slowly fights for more and more power until it has enough to simple declare what is or is not money. Then uses that power to print as much as it can before runaway inflation takes hold.

Bernanke's insight was nothing more than that of previous King's, coin as much money as you can before people catch on to what you are doing.

You project intentions onto Bernanke. You might very well be right about the consequences, but that says nothing about his motivation to do what he did.

Some not so random related thoughts:

- It's not always inflation by the way that eats away at money's value. Often it's replacement with something else, by force. Much of nazi occupied Europe has experienced this after WW II. Much of eastern Europe has experienced similar things after the fall of communism.

- Inhabitants of the US have not really experienced their money losing the majority of its value over the past ~200 years. In that way, the US have been more unique than many people realise.

- I've found David Graeber's "Debt: The First 5000 Years" [0] very interesting. He makes the point that we should think of at money as debt. Whether you agree or not, it's an enriching point of view.

- The biblical concept of the Jubilee [1] is fascinating. It demonstrates how debt forgiveness cycles were deeply embedded in some ancient Middle Eastern cultures.

[0] https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years [1] https://en.wikipedia.org/wiki/Jubilee_(biblical)#cite_note-5

Yes. Money is debt. When I receive money in my paycheck, I've exchanged real resources--my time and labor--for something which, in and of itself, provides no use value whatsoever. It is a debt that I can call in on anyone else in society, to receive the product of their labor in exchange for a token.

> Often it's replacement with something else, by force. Much of nazi occupied Europe has experienced this after WW II. Much of eastern Europe has experienced similar things after the fall of communism.

that is a single data point, and also a fairly unique situation. I don't foresee nazi like regimes in the west rising up any time soon (tho, given how trump's been going as of late, may be i m too optimistic?!).

The problem with inflation is that it's it eats away at money differently for the poor vs the rich. And i do believe the rich benefit much more from inflation than the poor does. But the poor make up a majority of the population.

I fail to believe that (low) deflation is actually as bad as the central bank economists claim. Inflation encourages investment, but also encourages more risk taking. I understand that high deflation has negative detrimental effects on an economy, but so does high inflation!

Low deflation encourages saving, and encourages prudent investment. I think such deflation will stop cyclical credit-induced recessions, and make the economy grow at the rate of technological improvement.

"The demand destruction we're seeing today..."

Spot on.

Supply side economic policies (Reaganomics) was a defensible policy for the 70s. While plenty of people thought it was voodoo economics (eg Bush Sr), we needed some kind of course correction.

We're now faced with the exact opposite situation. So we'll need appropriate remedies.

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