A tale of two bankers

Posted by: Paul Donovan

13 Mar 2020
  • Economists do not normally pay too much attention to equity markets. Economists exist on a higher intellectual plane. US President Trump appears to pay attention to equity markets. Thus, the fastest US equity collapse from market peak to bear market may affect US economic policy. (The S&P fell 27% from its highs - it is up 38% converted into Bitcoin. People should not convert into Bitcoin).
  • The Fed has reacted by injecting liquidity into financial markets. This is replacing less liquid assets with more liquid assets. The money will not go into the real economy (e.g. to small businesses). However, orderly financial markets help governments fund fiscal policy.
  • The ECB was the reverse of the Fed yesterday. Very sensibly the negative interest rate (tax) was unchanged. Sensibly there was a plan for cheap loans to small businesses. Less helpfully ECB President Lagarde suggested it was not the ECB's job to close bond market spreads. Economists might suggest it is a central bank's job to maintain orderly markets. ECB President Lagarde is not an economist.
  • There are hopes of a limited US fiscal package to deal with some of the economic effects of the coronavirus. The US Senate has graciously agreed not to go on holiday just yet, to consider House proposals.

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