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Unlimited QE or the Willy Wonka Money Factory

Financial crises recur in part because memories fade.” – Ben S. Bernanke, Timothy F. Geithner and Henry M. Paulson Jr in “Firefighting: The Financial Crisis and Its Lessons.”

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis told CBS’s “60 Minutes” that “there is an infinite amount of cash in the Federal Reserve. We will do whatever we need to do make sure there’s enough cash in the banking system.”

The Federal Reserve then announced Monday morning it would embark upon open-ended purchases of U.S. Treasuries and agency mortgage-backed securities. The Fed will buy “in the amounts needed to support the smooth functioning of markets for Treasury securities and agency MBS.”

The Fed suggested one week prior caps of $500 billion of Treasuries and $200 billion of agency MBS, and also revealed details about other programs, including providing up to $300 billion in new financing, and a Secondary Market Corporate Credit Facility, so as to enable the central bank unmatched access to U.S. credit markets.

The Treasury will invest $10 billion into this special-purpose vehicle, and then purchase corporate bonds rated triple-B or higher with no more than five years until maturity, as well as U.S.-listed exchange-traded funds that “provide broad exposure to the market for U.S. investment grade corporate bonds.”

The Fed is trying to calm Treasury and corporate bonds. Te debt market governmental and non-financial corporate obligations have ballooned in the past decade. It is no wonder they’re responsible for straining the financial system this time around.

Over the preceding ten years, the Federal Reserve has provided corporate America with rock bottom interest rates. Companies allowed their credit ratings to slide and used debt proceeds to buy back stock. The Bloomberg Barclays investment-grade corporate bond index, which follow the broad market, grew from approximately $1.8 trillion in October 2008 to more than $6 trillion as of this month.The Institute of International Finance estimated that global non-financial corporate debt grew by $27 trillion since the 2008 crisis.

The Institute of International Finance estimates that global non-financial corporate debt has grown by some $27 trillion since the 2008 crisis. Companies are of course over-leveraged and unable to withstand the economic shock from the coronavirus outbreak.

Not only did the Federal Reserve hint at #UnlimitedQE, but so too has Bank of England and The European Central Bank.

The Bank of England said it has “unlimited amounts of money.”

Bank of England governor Andrew Bailey on Wednesday, suggested that the central bank was considering printing money and giving it directly to UK households. “Everything is on the table that is reasonable, within the policy toolset,” he told Sky News. “We have a very large toolkit.

I don’t rule anything out, frankly, but please don’t therefore interpret it that we’re about to do it either. I think nobody in their right mind in my role would say, ‘well, you know the following things I would never do’ — because that’s foolish.”

He added: “We will meet the needs of the economy.”

Sunak last week announced a further £20bn in stimulus measures and an additional £330bn in government-backed loans for businesses––15% of GDP.

A couple of weeks ago, the Bank of England cut its benchmark interest rate by 50 basis points to 0.25% with little room for a further cut.

The European Central Bank (ECB) introduced a new €750 billion ($820 billion) response to the coronavirus in a bid to calm financial markets.

“Extraordinary times require extraordinary action,” tweeted ECB boss Christine Lagarde. “There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.”

“The Governing Council is fully prepared to increase the size of its asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed. It will explore all options and all contingencies to support the economy through this shock,” the ECB said in a statement.