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Stop Freaking Out About Monetary Policy

Our misplaced outrage is making us look uninformed and isn’t helping our cause.

Yesterday I took a look at Facebook and found a glut of posts about the $1.5 Trillion which the Federal Reserve injected into the economy to prevent a financial crisis.

People were outraged. I saw dozens of posts and re-posts castigating the ‘government’ for ‘spending’ $1.5 trillion on stock traders and other pernicious one-percenters. How could we just hand out free money when student loan debt, medicare-for-all, and a Green New Deal are sitting on the policy docket-- starved for funds?

But, we didn’t. The situation, like most policy situations, is complicated.

To begin, let’s dispense with the idea that this was the government or the president. It wasn’t.
The Federal Reserve is, for all intents and purposes, a private bank. It was founded in 1913 by President Woodrow Wilson to manage the supply of dollars in the economy. When the Fed thinks there aren’t enough dollars it buys assets from banks and gives out dollars. When it thinks there are too many, it sells those assets and pulls dollars out of the economy. All of this is done in the service of maintaining an interest rate target-- and it is separate from the government. The president cannot control how much or how little the Fed changes the money supply.

Which brings me to the next point: this was not a government bailout. This was monetary policy. The Fed offered three windows to banks during which they could obtain short-term collateralized loans. But to get these loans, they must offer Treasury securities of the same amount in return and pay the fed back later, with interest. This process costs nothing to the Fed. There was no transfer, no bailout, no free money to rich bankers, and nothing for Wall Street.

Instead, banks were given liquidity to loan out for spending. This spending, combined with other factors like inflation, induces people to spend a dollar today rather than a dollar tomorrow. This stimulates the economy and helps prevent recession.

In terms of the Fed’s mandate, this was effective and necessary monetary policy to prevent a financial meltdown akin to the 2008 crisis. It was not a malignant attempt to ‘steal taxpayer money’ for a bailout to the wealthy and powerful.

When progressives claim that the government is being unfair by bailing out Wall Street rather than students, we fundamentally misunderstand the problem.
It is important that this be clarified soon, so progressives in the US can focus on issues which deserve our attention.

Some Sources:
https://theweek.com/articles/901853/feds-15-trillion-intervention-explained
https://theweek.com/articles/867241/sudden-interestrate-spike-highlights-two-contradictory-fed-trends
https://www.theatlantic.com/ideas/archive/2020/03/federal-reserve-trying-stop-financial-crisis/607987/

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