WASHINGTON/FRANKFURT (Reuters) – Big central banks are buying from an expanding menu of government bonds, corporate debt and consumer loans to help businesses and households through the coronavirus pandemic — and no one knows whether they can stop.
FILE PHOTO: A woman, wearing a protective mask walks past the head quarter of the European Central Bank (ECB) during sunset in Frankfurt, Germany, April 29, 2020, as the spread of the coronavirus disease (COVID-19) continues. REUTERS/Kai Pfaffenbach/File Photo
The best-case scenario sees infection rates slow, commerce resume and people return to work this year.
In the extreme case that a recurring virus requires further damaging lockdowns, the U.S. Federal Reserve and its peers float the whole boat — government debt, corporate debt, perhaps even financing for mortgages and paychecks.
The social, political and economic implications of taking economies offline for an extended period, underwritten by governments and struggling to return to normal, could run deep.
Time out of work erodes skills. Business failures destroy wealth and depress investment. Cheap money and cash transfers risk fuelling asset bubbles that widen the gap between rich and poor.
“It gets to the question: At what point are we worried with just how much a role the Fed is playing?” said Kathryn Judge, a Columbia Law School professor who studies financial markets.
“If they are the only actor and people are worried about liquidity and access to finance, how much pressure comes to bear? Longer term it is disconcerting.”
The Bank of England announced in May that it would buy more government bonds just as Britain’s Treasury said it would incur more debt to pay the wages of laid-off workers.
BoE policymaker Jan Vlieghe said the unprecedented coordinated action resembled