Fighting The Last War With Quantitative Easing

In 2008, the problem was a loss of faith in the financial system. People believed their money to be unsafe. Bear Stearns and Lehman Brothers went belly-up, and it was only a matter of time before the ripple effects hit every financial institution. Consumers and businesses panicked, trying to get to cash as quickly as possible. The net effect? A massive credit crunch, especially with instruments like CDOs which were fractional lending at its worst, re-loaning the same dollar over and over again.

The programs put together by the Bush and Obama administrations fought off disaster by basically flooding the lending market with cash, allowing banks to borrow and not have to implode from not having enough cash, enough liquidity to meet demand. It was exactly the right call from both administrations, though it created its own ripple effects later on (like the second tech bubble).

The problem we face today that the US government addressed a little while ago isn’t the same problem. Consumers aren’t rushing banks to get their cash and hide it under mattresses. There isn’t a liquidity crunch. At best, there’s a toilet paper crunch, and that’s relatively easy to print. No, the problem is that the consumer engine planetwide is stalled – and for GREAT reason. You know, pandemic.

Which means that cutting interest rates to zero and issuing asset buybacks are fighting the last war. Businesses that are going out of business don’t need easier loans, they need customers to buy things. And we explicitly don’t want people buying things for a couple of months beyond the necessities to keep them safe.

So what should the US government have done? A liquidity move at the small and midsize business level. SBIRs on steroids. Zero interest, guaranteed loans to businesses, scaled with their income, to keep the sandwich shop afloat while no one is buying sandwiches. Combine that with the Bush administration’s sensible tactic of just cutting taxpayers a check, and you’d make a dent in the current problem. If you got a check that covered the rent for a month or two and bought groceries, you’d be a lot less worried about not being able to work during that time – and you’d stay home. But as usual, we’re solving the wrong problem and fighting the last war.

Textbooks will be written on this period in time and the decisions that governments around the world made to protect their citizens. They will roundly criticize – appropriately – the US response.


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