As economic recession looms, central banks, along with federal governments, are using all tools at their disposal to keep businesses and consumers flush with needed cash. Whether the measures will be adequate remains to be seen.
Nigel Green, chief executive and founder at financial consultancy deVere Group, is doubtful about the cash influx.
In a release on Wednesday, Green cited the U.K. government’s US$405-billion package of loans to businesses. Despite the package representing 15% of the U.K.’s annual GDP, Green said the amount is likely insufficient, judging from the “spooked” stock markets that continue to sink.
Green also questioned whether the cash will ultimately reach individuals and companies quickly enough — or be impeded by politics.
Another issue is that the U.K.’s injection comes through bond issuance, yet the bond market responded with fear: the 10-year gilt yield was up on Wednesday morning from one day previous, Green said.
Market mechanics are also a concern. The Volcker Rule, part of the Wall Street reforms implemented after the Great Recession, aims to protect consumers by prohibiting U.S. banks from making speculative investments. Yet, the rule could impede market functioning during this unique crisis.
“The Volcker Rule post-2008 prevents banks warehousing risk, so if everyone sells and there is no-one to buy, then what happens?” Green asked. “Previously, banks’ proprietary trading desks would take risks, but they are not allowed to now, meaning central banks will have to step in.”
If the markets don’t function as they should, credit markets would take a significant hit, which would be “a major issue as corporate America has borrowed more than ever before,” Green said.
Federal Reserve actions
Central banks have aimed to get ahead of the crisis.
“It’s hard to see what more [the Fed] could possibly do in the very short term,” wrote Francis Généreux, senior economist at Desjardins, in a monetary policy report earlier this week.
Généreux was referring to the Fed’s recently implemented measures, including slashing its benchmark interest rate to a range of 0% to 0.25% and announcing it will buy $700 billion in bonds, including Treasuries and mortgage-backed securities.
The Fed also lowered the interest rate it charges to banks that borrow from its discount window, and reinstated the commercial paper funding facility, whereby it makes short-term loans to qualifying firms.
The Fed and Bank of Canada, along with some of their global counterparts, have also joined to provide cheap U.S.-dollar credit to banks overseas.
Some further ideas to get credit floating in the medium to longer term were floated Wednesday in the Financial Times (subscribers only) by two former U.S. Federal Reserve chairs, Ben Bernanke and Janet Yellen. These included tools such as a low-cost financing facility for banks to support lending.
In the long term, Green said he’s confident that current market volatility will “highlight that we live in a time of great capabilities, opportunities and great promise.”
For now, investors must consider their portfolio positioning.
“With this volatility, people should revise and perhaps rebalance their financial strategies and portfolios to create, build and protect their wealth as the economic landscape evolves,” Green said.