As other countries have looked enviously at South Korea’s effective response to the coronavirus crisis, we keep hearing that that country had the advantage of a dry run: In 2015, South Korea faced an outbreak of Middle East Respiratory Syndrome, a coronavirus that is more deadly but less contagious than the one we’re fighting now. South Korea learned what had worked in that fight and what needed to be done differently, and the government developed epidemic-response capabilities it could take right out of the box for this crisis, which allowed South Koreans to achieve better infection control with less economic disruption than in the U.S. and Europe.
As I look at the uneven response of our government, there’s one major agency that stands above the others for its preparedness and swift action. It has tools at hand that match the scope of what’s being asked of it, and it deploys them in a timely manner to mitigate the portion of the crisis that it’s responsible for managing. I’m talking about the Federal Reserve. And the Fed been performing so strongly in part because it had the benefit of its own dry run in the form of the last financial crisis. In the heat of that crisis and the aftermath, the Fed developed many of the tools it’s using now to contain the economic damage from the coronavirus. We’d be even worse off without it.
Of course, this crisis is mostly outside the Fed’s zone of responsibility and so its efforts can only go so far. The Fed can’t kill the virus. It also can’t stop the severe economic disruptions that come from the extensive shutdowns of business and social activity caused by virus-fighting measures. What the Fed can do, and has done, is to prevent the epidemic from causing a financial crisis, which would in turn cause an additional shock to the economy at large. The Fed’s role is to stop the economic damage of the virus from spiraling out of control, and so far it has succeeded.
“The Fed learned a lot of lessons from 2008 and 2009, and I know for a fact from the work they’ve done inside and outside the building, they haven’t just spent the last ten years resting on what they did in 2008 and 2009,” says Tony Fratto, a partner at Hamilton Place Strategies and a former spokesperson on economic policy in the George W. Bush administration. “There was a lot of work in that building about how to prepare for the next crisis and what we might do under various situations.”
The Fed directly controls interest rates on short-term government debt, but if banks and other market participants are reluctant to lend because the economic outlook is shaky, lower rates won’t necessarily flow through as lower costs or credit availability to borrowers. So after the 2008 crisis, in hopes of finding ways to stop something similar from happening in the future, the Fed developed strategies to push down a broader range of interest rates and support the availability of credit in more sectors of the economy. In the last crisis, the Fed started buying long-term government debt and mortgage bonds. Now, in partnership with the Treasury Department, it buys corporate and municipal debt. These direct interventions in diverse parts of the credit markets give the Fed more control over interest rates in more places and therefore more ability to maintain stable financial conditions that help keep the economy healthy. As a result, the Fed has had more juice than you might expect, given the very low interest rates that we entered this crisis with.
“There was certainly a sense that, for the new reality of low interest rates across Western society, the Fed would have to innovate monetary policy, and you’re seeing some of the fruits of that thinking,” says Mike Konczal, an economic-policy expert at the progressive Roosevelt Institute think tank. Konczal says the Fed has outperformed expectations in this crisis — “It is very easy to imagine a Fed chair doing half-measures here,” he says — though he notes these extraordinary programs will require ongoing oversight, and he would like to see tighter restrictions on when and how companies that borrow through the Fed’s programs can return capital to shareholders.
All of this active market participation from the Fed would once have been wildly controversial. Indeed, it was wildly controversial when the Fed brought out some of these tools in the 2008 crash and the following years. Conservatives complained the Fed would spark rampant inflation by buying so many assets and that it was “picking winners and losers” by easing the credit markets instead of letting more weak companies go bankrupt. But inflation hawks seem to have been chastened from years of being wrong over and over, and since there is now a Republican president who wants the Fed to be more aggressive than less, those “winners and losers” complaints have become more subdued (though the Wall Street Journal editorial board is still making them). And one key benefit of learning from the last crisis is that the Fed didn’t just develop technical capabilities; it also fought the political battles necessary to allow their use.
“Jay Powell rolled out just about everything that Bernanke had fought for, for years in the last recession, and did it just literally overnight,” says Tim Duy, an economics professor at the University of Oregon and author of the Fed Watch blog.
Institutions that have had to manage other important aspects of the economic response have generally been a lot slower off the starting blocks than the Fed has. The CARES Act included extensive funding for enhanced unemployment benefits, payroll support to small businesses, and payments to most American taxpayers, but two and a half weeks after its signing, most people who are entitled to all that money are still waiting to get it. That’s because the law relies on a piecemeal approach involving the IRS, the Small Business Administration, state unemployment agencies, and private banks to process huge numbers of applications and payments — often well beyond their normal capacities — to get money indirectly from the federal government to workers and businesses that need it. I think this approach likely was the best one available on such short notice, but unlike the Fed, these entities are being asked to do things they had not contemplated before a few weeks ago, so it’s no surprise it’s taking them some time to figure everything out.
But one silver lining of this crisis is that, for many of those agencies, this crisis will have been a dry run. We are learning on the fly that it is important to be able to get bigger unemployment checks to more people faster; we are learning how to get money in the hands of businesses that have temporarily lost their whole customer base but can expect to get it back, if only they make it through this; we are learning how to get tax-rebate payments to as many Americans as possible as quickly as possible. After this acute crisis is over, policy-makers should consider what we learned and what infrastructure we need to stand up our economic-response programs much more quickly if we have to do this again. We’ve already seen the benefit of that at the central bank.