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The End of LIBOR: Crucial Liquidity Measures by the Federal Reserve System

In order to deal with the tremendous recent market disruptions and related liquidity needs, the Federal Reserve System, through the Federal Reserve Bank of New York (New York Fed), on March 12 offered $500 billion in 3-month term repos to settle on March 13. In addition, on March 13, the New York Fed offered $500 billion in 1-month term repos. Federal expenditures, along with political leadership, is required in the United States and other countries to deal with near-term health care needs and contain further long-term economic damage. 

The foregoing liquidity infusions are in addition to the offerings of (i) at least $175 billion in overnight repos on a daily basis and (ii) at least $45 billion in 14-day term repos to occur twice per week over this period. Approximately $250 billion of net liquidity was infused by the New York Fed on March 12 and $86.3 billion was infused on March 13.

Requisite Fiscal Stimulus

Unfortunately, the Federal Reserve and other Central Banks primarily have only monetary tools at their disposal. 

Federal monies should be targeted, by way of example, as follows: (i) immediate short-term - widespread testing for those potentially infected, protections for health care professionals, and work interruption payments to individuals and small businesses in need, (ii) medium-term - personnel, equipment, and facilities to handle increased medical care requirements, and (iii) long-term, to reinvigorate the economy and provide greater resiliency (but only after the health crisis has subsided) - infrastructure improvements and environmental protective measures.

After 9/11, adequate protections and safety protocols were not provided to first responders, Federal officials assured those impacted that health impacts were minimal and those in immediate financial distress were required to wait several months for Federal aid.

During the Great Recession, fiscal measures were undertaken relatively quickly through bipartisan cooperation between both the Bush and the incoming Obama administrations and, then, such measures were implemented much later in other countries. Recognition of the necessity of the enactment and implantation of extraordinary fiscal programs on an expedited basis enabled the US to recover years before the rest of the world.

Hopefully, all policymakers across the globe have learned this important lesson.


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