The Sovereign Fed

The Sovereign Fed

In terms of crisis governance, the United States is not a country with a central bank. It is a central bank with a country.

Federal Reserve Chair Jerome H. Powell (Mark Makela/Getty Images)
Read more of our coverage of the coronavirus crisis here.

When Chinese supply lines were disrupted in late February because of shutdowns attempting to stop the spread of coronavirus, businesses and financial institutions around the world started to have trouble getting cash. In response, businesses sold assets, like stocks, and banks began to restrict lending. As everyone tried to sell all at once, prices collapsed, which necessitated more selling and caused further price declines. Over the next three weeks, stock markets around the world shed 20 to 30 percent of their value, and currencies collapsed as everyone everywhere sold everything for dollars. In effect, though not in cause, this was a sudden plunge back into the world between the failure of Bear Stearns in the spring of 2008 and the bankruptcy of Lehman Brothers that fall. In 2008 it was called a “credit crunch.” In general it’s called a “liquidity trap.” And there has never been a global scramble for dollars as fast as, and on the scale of, the coronavirus liquidity trap.

In response, there has been a wave of unprecedented monetary policy activity. Central bankers around the world, especially the Federal Reserve, have intervened to support essentially every credit market on earth. On March 12, the Fed announced that it had made $1.5 trillion available for the “repo market,” which is the main source of short-term credit in the financial system. Even in the post-2008 world of gargantuan central bank interventions, $1.5 trillion was a lot. It bought a single good day: Friday the 13th. Over the weekend, the Fed decided that the pandemic—officially declared on March 11—had pushed financial markets into truly uncharted territory. It cut interest rates to zero, moving about four of its typical 0.25-percent steps in a single leap, and announced that it would buy $500 billion in Treasury securities (a variety of safe U.S. government debt issued by the Treasury Department for varying lengths of time) and $200 billion in mortgage-backed securities. The Fed thereby restarted the 2011–14 quantitative easing program on an immense scale. The point was to flood financial markets with cash as quickly as possible, so banks could keep lending, buyers of stocks could keep buying, and institutions could keep making their debt payments. The financial press, which likes military metaphors, called it a “nuclear bazooka.”

The nuclear strike failed. When markets reopened on Monday, March 16, all Wall Street indices immediately lost about 12 percent of their value. The Fed then announced that it would buy $1 trillion of “commercial paper,” which is short-term unsecured corporate debt. The Federal Reserve Act requires that the Fed not take risks, and only exchange cash for secure assets like Treasuries, so the decision to buy $1 trillion in something relatively risky like unsecured corporate debt would have been astonishing under any other circumstances. The European Central Bank announced its own fund of €750 billion to buy commercial and government debt. Central banks all over the world began using every means available to inject cash into their financial markets. To support its efforts, the Fed gave other central banks access to $450 billion in currency swaps—essentially, access to dollars in case their banks needed to make payments in dollars, or their central banks needed to support their currencies with dollars. By March 23, the Fed had announced that it would do as much quantitative easing as was necessary to support the financial system: QE Infinity.

It appears that infinity was the price tag needed to stabilize the global financial system. Stocks have recovered, and no “systemically important” institution has failed, even as over 22 million Americans (a partial figure reflected in unemployment insurance claims) have lost their jobs in the worst labor market collapse in recorded human history. The $2.2 trillion CARES Act, passed on March 27, contains $500 billion in loans and loan guarantees under the control of Steve Mnuchin, the Treasury Secretary, former Goldman Sachs executive, and former CEO of predatory mortgage lender OneWest. Of that, $454 billion is to be handed over to the Fed’s Exchange Stabilization Fund as collateral so the Fed can make loans to medium-sized businesses. The logic is that medium-sized businesses, unlike larger corporations, mostly don’t have Treasury bonds or commercial paper for the Fed to buy, and the Fed can’t risk taking losses by giving free cash to insolvent companies. That $454 billion takes the place of the safe assets the Fed would normally buy when it does quantitative easing, which means it can leverage that money. Most financial journalists seem to agree that it can do so by a factor of ten, allowing the Fed to make up to $4.5 trillion in loans. The words “up to” are doing a lot of work lately, because the Fed can change, and has already changed, its leverage ratio rules, meaning the total could either be much more or much less. Since universality is not a principle of any bailout measure, the Fed has a lot of discretion over volume and direction.

This part of the CARES Act has been widely characterized as a “slush fund” under the sole discretion of Mnuchin. As of this writing, the reality is very unclear. The text of the bill includes many provisions and requirements. It is targeted at companies employing between 500 and 10,000 workers, which comprise about 17 percent of the U.S. labor force. (Small businesses are supposed to avail themselves of the wildly inefficient Paycheck Protection Program.) Companies receiving this money must agree to retain 90 percent of their labor force through September 2020. They must be U.S. companies, they cannot use the money for share buybacks, they must agree to pay anyone who makes more than $425,000 the same amount they were paid in 2019, and they must remain neutral in any union organizing campaign. If followed, these provisions would make it conceptually, politically, and legally possible for the Federal Reserve to spend $4.5 trillion paying the wages of 20 million Americans while they do not go to work for six months.

That is a very big “if,” and nobody in the U.S. government has suggested that is what they are actually going to do. The bill states nothing about remedies for violations of these terms, and Mnuchin has the ability to waive them if he considers it necessary. Companies have to make “good faith” commitments to following the provisions, which might mean nothing at all. The Trump administration immediately announced it would simply ignore the oversight mechanisms. But there are also some indications that the provisions are real: cruise ship companies appear to be excluded because they are chartered outside the United States in order to avoid pesky things like taxes and labor and environmental regulations. The chair of the Senate banking committee has asked Treasury for clarification, and Larry Kudlow (once a Bear Stearns analyst, now director of the National Economic Council) keeps turning up on television, claiming the government will buy equity stakes with this money, which would imply a vast increase in government ownership and control over the private sector.

Critics like Elizabeth Warren and Matthew Stoller claim the oversight mechanisms are hollow and the stimulus bill constitutes a no-strings-attached $4.5 trillion handout from taxpayers to corporate America. That might be true. But the roughly $2 trillion in after-tax profits made each year are also a handout from taxpayers to corporate America. They were just produced through market mechanisms and the tax code rather than stimulus legislation. The Warren line of critique is both too much and too little. Too much because this particular fund is only a fraction of what the Fed—in collaboration with fiscal and monetary authorities around the world—is doing to try to save the structures of global capitalism. (As the Fed hastens to point out, these are loans, not gifts: they must eventually be repaid, and the Fed cannot simply grant money to targeted beneficiaries.) And too little because of how drastically the mechanisms of global capitalism appear to be breaking down, opening up a range of radical possibilities that were utterly unthinkable just weeks ago.


It is necessary to contextualize these coronavirus response funds in the wider sweep of the ongoing changes in the structure of global finance, and the attendant implications for real people with real jobs. Well before February, there were indications that capital markets were sick. The repo market abruptly seized up in September 2019, prompting the New York Fed to offer $75 billion every day in twenty-four-hour funding. In the summer of 2019 the famous “yield curve” of the cost of Treasury debt had inverted, which usually signals that financial markets are expecting an imminent recession and are therefore willing to pay more for access to safe government debt in the short term. Since 2011 at least, capital accumulation had been running on the basis of continual quantitative easing and low interest rates: an unceasing flow of cheap money that made even transparently ridiculous entities like WeWork briefly seem like multi-billion-dollar companies. Corporations had mostly used that cheap cash to buy back their own shares. Buybacks reached an all-time peak in 2018, when U.S. corporations spent $1.09 trillion purchasing their own shares. The second-highest level was 2019. (Share buybacks are excellent for shareholders: companies buy more control of themselves and drive up stock prices, because there are fewer stocks in circulation, and anyone holding those stocks gets richer.)

Corporations had also been busy buying each other: 2018 and 2019 set records for global merger and acquisition activity, which abruptly slowed in January 2020. Across 2018, U.S. stocks showed no gains in total, and the Financial Times reported that essentially all global asset classes had lost value. Financial markets were not working the way they were supposed to. They were not matching savers with borrowers to fuel job growth, innovation, competition, and all of the other characteristics of a capitalist economy. A few very large corporations were using a glut of cheap government money to make themselves even bigger, to buy out their rivals, and to enrich their shareholders, on a level they themselves appeared to believe was unsustainable and shortly about to produce a recession.

The post-2008 monetary system was not like the world policymakers had been educated to manage, with a set of tools they learned how to use in the long era of neoliberal hegemony between 1979 and 2007. Trillions of dollars of central bank liquidity were not producing inflation. Interest rates were losing traction. Something was wrong. It was clearly impossible to continue that low-level monetary emergency forever, but also impossible to do anything else.

The pandemic has annihilated most of the boundaries of the possible. The Fed is now the sole source of global liquidity, providing cash not only to every financial and credit market on the planet but also to the world’s central banks. Its statutory independence and its insulation from democratic oversight or accountability mean that it can act faster and with more focus than any other governance institution on earth. In principle, the U.S. Congress is sovereign and the Fed is a delegated agency, bound by many laws that restrict what it can do, but for that power relation to work, Congress would need to function—and to assert its constitutional role as a check on other branches of government. It has neither the capacity nor the interest in doing so, which means that in practice, the Federal Reserve decides on exceptions and norms and determines how to act when normal institutions prove incapable. The crisis of 2020 has revealed the extent of the power it has amassed since 2008. As Adam Tooze has recently argued, the true location of American global hegemony lies not in the White House, but in the Federal Reserve.

Consider the contrast between the Fed’s rapid, sustained, decisive action and the utter lack of a coordinated response to the coronavirus outbreak by the federal government, alongside the cacophony of different responses by the states. The Fed’s decision to open up the Municipal Liquidity Facility earlier this month to provide short-term funding to states, counties, and cities was a more coordinated national response than could be found from any other part of the federal government. In terms of crisis governance, the United States is not a country with a central bank; it is a central bank with a country.

In some regards, the current prominence of central bank power is a welcome and overdue development. There should be more public awareness, discussion, and oversight of central banking and monetary policy. Political movements of both the left and right are used to thinking of key institutions in the Gramscian “war of position”: elected offices, courts, the media, think tanks, universities, and so on. Central banks, and especially the Fed, have been overwhelmingly powerful strategic institutions since at least 1979, but their powers have only really attracted political scrutiny since 2008. The events of 2020 should put control of central banks at the center of any transformative political strategy.

For years anyone advocating for a better world has been told that change is impossible, because their policy plans are insufficiently detailed, and because “we” can’t afford anything better than this. Economic policy in the last three weeks has moved the world close to a mirror version of the most radical dreams of the contemporary left: a world with less flying, less driving, less consumption, less oil production, but more leisure time, more assertion of community, more creativity and collaboration. A world in which wages and output, the commodified labor engine of capitalism itself, is fundamentally breaking down. So why are we talking about a slush fund instead? Because, as this crisis has revealed, there is an enormous concentration of economic power in the world, but little of it is held by regular people, organized labor, and the parties of the political left. Because we are entering this world not through a political revolution that brought about a Green New Deal and universal healthcare, but through millions of job losses and a horrifying collision with the cruelty of the private healthcare system. It has long been common knowledge that most Americans are one unexpected health problem away from bankruptcy; it turns out the same was true for global capitalism.

Capital is getting a bailout, that much is certain. What would a people’s bailout look like? Would it even be a matter for monetary policy, or solely within the purview of Congress?

Some argue that the Fed is already doing everything it can: the problem with it being the only functioning institution of national and international governance is that it is not designed to bail out regular people. It is a bank, designed by and for the financial system, staffed by people trained in and professionally imbricated with the banking world. We have institutions full of elected officials that are supposed to care about regular people, but they mostly don’t. Others would press the limits of the Fed’s powers even further. In 2018, total wages and salaries for all workers in the United States amounted to $8.3 trillion. If the crisis horizon is, say, September, we can imagine that the price tag for paying all workers in the U.S. economy for six months is something like $4.2 trillion—just about what the leveraged CARES Act money is supposed to direct to medium-sized businesses employing less than a fifth of the labor force. Again, the Fed has powers to lend, not spend, and it is not intended to create a universal basic income. But it also has wide powers to determine when and how its loans will be repaid, and it does have a legal mandate to deliver full employment. A People’s Fed could plausibly give every worker a monthly zero-interest loan, and then forgive them all. Even setting aside wage replacement, a People’s Fed could be buying and retiring student loans and medical debt.

The last month has shown conclusively how rapidly and extensively the structures of economic life can be changed, and how utterly powerless the political left is to drive those changes. Will that $454 billion turn out to be a $4.5 trillion corporate handout? Will governments and central banks decommodify labor, freeze evictions, and buy controlling stakes in private companies? We will wait and see. For now, we have no other choice.

Trevor Jackson is an assistant professor of economic history at George Washington University, where he teaches the history of inequality and economic crisis. He is writing a history of impunity in European financial markets.