17 April 2020
How much “support” should central banks give their Covid-19 stricken economies and how? While all eyes have been on the fiscal responses, what tools remain in the monetary policy armoury? flow´s Clarissa Dann looks at Deutsche Bank Research and central bank insights on short and long-term economic rescue remedies
Some 10 years before the Global Financial Crisis, Long-term Capital Management (LTCM) – a large hedge fund with US$126bn in assets, hit the wall. Its founders were experts in investing in derivatives to outperform the market.
In the summer of 1998, the markets went sour in response to financial turbulence in Asia and then Russia. As the New York Times1 put it, “with terrifying suddenness bond markets turned skittish and all the fund’s gambits ran into trouble”. By September, LTCM was close to bankruptcy, at which point a group of 14 banks and brokerage firms invested US$3.6bn to prevent the hedge fund’s imminent collapse. The arrangement was facilitated by the Federal Reserve, though the Fed did not lend any of its own funds.2 This intervention, which some observers deemed to be unnecessary in the first place, continues to raise questions to this day about central bank protection of private financial institutions.
After years of very low or negative interest rates, and huge quantitative easing programmes to stimulate demand, what roles do central banks and monetary policy intervention have in getting economies past the pandemic crisis without mortgaging the future up to the hilt?
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