The Breakdown - Can $700B in Quantitative Easing Calm The Markets? Feat. CoinDesk’s Michael Casey and Noelle Acheson

Episode Date: March 16, 2020

Over the weekend, the Fed decided it couldn’t wait for Wednesday’s planned meeting to act, cutting interest rates to nearly 0%. It also announced $700 billion of direct capital injection through the purchase of Treasury securities and mortgage-backed debt.  The question is whether this action can actually calm markets? So far, it’s not looking great. Within minutes, emergency circuit breakers were triggered again. Markets are down more than 9% on the day.  In this episode, @NLW chats with CoinDesk’s Chief Content Officer Michael Casey and director of research Noelle Acheson about: Why the market isn’t impressed with Fed action Why no Fed response will be enough on its own to solve the health crisis and the resulting economic dislocation Why we’re going to see more conversations in the coming weeks about UBI, MMT and other direct citizen stimulus 

Welcome back to the breakdown. An everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The breakdown is distributed by CoinDesk. All right. Welcome back to the breakdown. It is Monday, March 16th. And today we're going to do something a little bit different.

A week ago, we woke up to tweets from the U.S. president that this was just a bad flu, effectively. A week later, we are saying, seeing shutdowns across states and municipalities around the country. We're seeing a massive ratcheting up of financial intervention. And so to just help make sense of it, I have Michael Casey and Noel Atchison from Coin desk here to talk through really everything that's been going on. And so where I think I want to start is overnight the Fed took a much more significant and more dramatic action. So Noel, maybe if you could just kind of bring us up to speed with what is happening in terms of regulators or policymakers' response to this crisis that we have?

Sure, and I'll start with what happened yesterday, the reason the markets are crashing so much today. Yesterday, the Fed did the only thing it knows how to do, but it did so in a way that ended up having the opposite effect of the desired outcome. Yesterday, the Fed cut rates by a full point, and it announced significant support for the markets in terms of liquidity, and also it made it cheaper and more convenient for banks to borrow directly, etc. A bunch of measures that on the surface make a lot of sense, but we have to look at the way in which it did it. The Fed does not normally break its habit of its pre-scheduled meetings, but yesterday it made a very drastic announcement on a Sunday. And if any of you are classics scholars, actually on the

aides of March, which may have some portents there, but on a Sunday, that is in itself kind of extraordinary, and also just a few days after another extraordinary intervention from the Fed. It emptied its bazook onto the markets by lowering rates to zero, and in doing so, totally spooked the markets that know it doesn't have any more bullets to spend. Not only that, but we also know that the markets are worried about the economy. We're pretty certain that there's a lot more bad news coming. And what will the Fed do? That's a great question. It was what will they do? Because the point that you're making, I think, which is quite acute, is that in the context of having no more bullets, where do you go from here? So, I mean, Michael, how are you watching this, this new phase of

the Fed's response to the corona crisis? Well, it always to be understood in the context of the type of problem that it's up against, right? So 2008 was a financial crisis. The source of the crisis emanated from the plumbing of finance. And so when you had sheer liquidity problems within the payment system and therefore we had things like the commercial paper market breaking down, then the thing that perhaps you could do is throw a lot of money at that to bring liquidity to it because you're resolving that problem. The real problem here is a supply-side economic shock, right? It's how the markets are digesting the actual state of the world,

which is going into, yeah, like an epileptic shock. It's just everything is being shut down. You're opening it to this session, Nathaniel, just laid it all out. It's a rolling impact on the global economy. That's a supply-side problem. It's also a demand problem. It's about the fact that conferences are shifting like consensus is from a big event to a virtual one. This has a sort of rolling impact on the real economy. It's not clear that throwing a lot of liquidity at financial assets is necessarily going

to have anything to do to fix either of those problems. To Noel's point, it's the signaling that actually may be part of the problem here. Very, very nervous environment. You know, markets are not necessarily efficient managers of greed and fear, the two forces that happen simultaneously in the market, and they can become herd-like. And if you send the wrong signal, the herd can go in the wrong direction. So, yeah, there's maybe a problem of calibrating the weaponry to the actual task at hand here. And then that raises interesting questions about, okay, if the Fed can do nothing, if it has no bullets, what is it? And I tend to think there's a lot more that could and should be being done on the fiscal side, that's another discussion.

Well, so I think that's actually a great point of discussion. And Noel, I want to kick it back over to you just a second. But the point that I want to kind of reinforce that you just made is that they're using a 2008 era toolkit for a crisis that is very different, right? Noel, is that accurate? And if so, what might be a better or different response? No, totally. And to further my weapons analogy, it's actually, not even so much have they run out of bullets, as in, were those the right bullets to be using in the first place? And Mike's right, this is very, very different from 2008. In 2008, we had the situation where you had the markets that were threatening to run the economy into the wall.

Here we have the economy threatening to run the markets into the wall. The same weapons are just not going to be appropriate. The Fed did do a couple of things that I thought was very interesting on Sunday, and one is the swap lines. I mean, it's unusual. They haven't been using swap lines, really, effectively for some time. But now with the swap lines, they are basically telling other central banks that we will lend you dollars. And this for a lot of global companies is going to be a lot of comfort. It really is. There's probably some debt being called in as we speak, but this is going to mitigate that. Another thing we have to bear in mind is why the Fed did this on a Sunday, because the main things that they did, the lowering rates and the lines and the repo

facilities and the interbank lending, that could have waited until their schedule meeting on Wendy, what couldn't wait? That's an interesting question. What could not wait until Sunday? What could not wait on Sunday is signs, alarming signs of liquidity just drying up in the market. We saw last week moments where you had bond prices and stop prices going in the same direction. That does not happen. When that happens, you know something is seriously broken in the market. And so they felt that they couldn't wait, not even just a couple more days, to step in and say this. Because if we thought the market was spooked by the Fed dropping rates to zero, nothing compared to how spoofed. the market would be when it noticed that bond prices and stock prices were both heading down

together. The question then becomes, what is it spooked about, right? And this is where what we're seeing is a cascading effect of concerns. So the original concern was supply-side shock. That was a very real economy concern. Then it's like a demand-side impact of all these events being shut down. So it's two-sided impact on the economy. The reason why the Fed may or may not, I don't want to speculate necessarily what it's concerned about. That's bespitt, to Noel's point that's what the market's worried about, it typically worries about a breakdown of the payment system, which is essentially a breakdown of the banking system. So are there banks about to go under? Is there an insolvency concern? But if that's the case, then it is an interesting

manifestation of the problem because it's not as if the solvency of banks itself was the cause of the concern in the first place. It's that people are seeing the multitude of impacts and that there is actually a fear factor in the economy that could bring banks down. So we've heard stories about people decamping from New, decamping from New York to the Hamptons and taking out massive wads of cash to take with them, right? So is there a lot on the banks happening? It doesn't seem like that would make a lot of sense because we've now got digital payment systems and we've now got other things to use. And on top of that, again, it's not that banks were the cause of the problem here. But it can be self-fulfilling, right? And that is where this stuff gets into dangerous

territory and where really innovative thinking about how to solve the problem, how to solve the problem in a targeted way to tackle what the society needs most right this instant, which is essentially as far as I'm concerned, to make sure that as many people as possible do not crowd hospitals. That is the priority. We need to think smart about how do we enable that. And some of that is money. It is about making sure that they can live on what they can do by not going to work or whatever, but it's not necessarily throwing a chunk of money at the markets. Nonetheless, markets are real, markets important, fear is a factor. And as I said, it can be a cascading, self-fulfilling prophecy. I wouldn't want to be a policymaker in this situation. My goodness,

what a difficult, difficult call it is for them. You talk about earning your place in the history books, right? One thing we need to remember, though, is that banks are now much, much healthier than they were going into the 2008 crisis. The Basel Accords have shored up the capital. So the chances of any bank going under now, even with rates at zero, is actually a lot less than it used to be. And we were talking earlier about what else can the Fed do? We should be thinking about that. What else can they do? Of course, they can take rates negative. That has happened in other rather important economic areas. I live in one. But nobody expects them to do that. So the next logical step is going to end up being something probably along the

lines of helicopter money, which is in itself kind of alarming for what it could do for inflation. But it highlights what you mentioned, Michael, that this is a payments crisis. This is a payments crisis more than anything else. And helicopter money can keep some of the pipes flowing. And the repos, we should keep an eye on them coming up. There'll probably be some intervention there, as you said before. That is going to be kept going. However, this does, as you hinted, also open up the opportunity, almost the obligation to think of what other systems out there could help alleviate some of the clogging of the plumbing that is no doubt coming, and at the same time can perhaps reassure some of the population that are being affected by the dislocation

that are lockdowns and other constrictive policies that are going to just freeze up supply and demand and then also the economy through all of that. One of the great ironies and frustration for those of us who have been watching this for a while, is that you had a scenario where for the first month, six weeks of this coming in every single day from China and seeing markets not react, right? And actually hitting all-time highs in mid-February. So you had this complete non-response,

this complete ignoring of everything going on, to shift to today where the only mass-scale intervention we're seeing is in the context of markets rather than actually dealing with economic implications, right? Not just kind of the financial asset price implications, but real disruption and dislocation to people's lives and not large-scale attempts around the actual health implications. You still, even as Trump was speaking at the end of last week,

acknowledging at least more than we had the beginning of the week, you're still not seeing him say this is a national health crisis and actually doing anything about the health aspect of it. And it's hard to imagine that there's not going to, to continue to be this wide-scale fear and growing without addressing, you know, all parts of it. Even holding aside entirely what we think is the right or wrong policy from the Fed, the fact that it's the only thing that we're really talking about. It's basically, you know, governors of individual states shutting things down and Jerome Powell trying to fix it with

rates, there's this almost like schizophrenia of how we've switched from the markets being insane because they're ignoring it to the markets being insane because the only intervention is in that context. But I think that for those of us who have spent the last five, six years thinking hard about how the structure of the financial system might be different with different technological solutions and so forth, this is a really interesting time, right? Because it's precisely the possibility that we've actually framed the set of solutions around a structure that is sort of set in stone and doesn't necessarily need to be that way. But the way you put it, like, I think Either it is, you know, shut everything down.

That's what governors can do. Or it is the Fed. But in fact, you know, some of these plumbing problems, you know, these are globalization problems, right? I mean, how do we deal with supply chains that are jammed up because of shutdowns around the world? How do we deal with the interconnectivity of the payments and good delivery systems? And how do we become nimble around that?

How do we build a resiliency into our supply chains? And so if one shuts down, we can go somewhere else. What policymaker concern should there be for that? I think whether or not we are all for central bank digital currency or Bitcoin or whatever, there certainly is an interesting conversation around central bankers who have looked at the role that central banks might play in having a more targeted approach to money management if there were to be a digital solution in play. You know, you've got the idea that it can be a targeted tool.

So this is all very speculative. We don't have any of these mechanisms in place. So it's all rather hypothetical. But it's useful to talk about to show where the limits of policymaking lie. So, for example, I have a registered wallet of some sort that is recognized as somebody who has been laid off because of a shutdown or who really should be at home looking after the kids, but I can't afford to or whatever. the distribution of funds directly to that person through some sort of digital account,

even if it is helicopter money, it's almost like targeted helicopter money, right, rather than fiscal handouts, you know, could actually be effective. The questions about what is inflationary and what is not kind of become different when we look at the marketplace of recipients of those funds from that differentiated perspective, right? It's going to be used differently for different purposes for different people. And yes, it feeds itself back into the economy and there may or may not be inflation impacts. I think that to my view, that's not something to worry about right now, not saying

that the Fed's doing the right thing, but that I do think this is a supply shock. It may not last and therefore the impact could be quite different. But nonetheless, thinking about how in a moment of crisis we deliver what is needed to people and just approach this from that perspective and then kind of deal with all the economic fallout later, I think is the right thing to do, given how desperate things are. When it comes to policymakers being reluctant to change anything, we have to remember that sentiment, as we've seen over the past couple of weeks, sentiment can change hard and fast. I think we can't deny that sentiment has changed really hard and really fast. And policy makers are an extension of sentiment. When public sentiment changes,

policy changes as well. That's how finance has always worked. It takes. a bit of time. But first the sentiment has to be there and I think we can agree it is. Yeah, right before we jumped on this conversation, the newswires had Mitt Romney coming out and saying that we should give thousands of dollars to people affected, right? Yeah. Which obviously, immediately the Yang memes started after that. Is there a Romney-Dang ticket? Somebody joked about a Romney-Dang ticket. Yeah, I joked last weekend, I guess, that if Yang got on CNN for his new role,

and instead of talking about the debates, he just announced that he was coming back in. You could see a crazy uptick and excitement. But I think, Michael, to your point, that the Overton window around the conversation about every kind of direct government interventionist thing, whether it's UBI or MMT or, you know, pick your acronym, right? Like, it feels like it is shifting right in front of our eyes. And it feels hard to imagine a world in which those things are off the table. And I think to your point, the greater the precision of the tools by which we can,

could deploy those things and the more sophisticated, the more able to actually have that conversation in precise terms rather than kind of broadly and philosophically, right? Like, is it good? Is it bad? It's like, we'll model it out on the basis of being able to actually deploy it in a different way. And I do think that's going to be an important conversation. But maybe just to wrap up, I want to steer us back to implications for Bitcoin implications for the crypto markets themselves. I know for me personally, it's honestly, it's kind of felt hard to spend that much focus on it when we're still, like I said, you know, this is the first Monday where everyone's finally taking this seriously. But at the same time, you know, obviously one of the notable hallmarks is that Bitcoin has never

been more correlated with equities than it has for the last two weeks. And there's a lot of conversation around what are the narrative implications of that? Are there people who are, does this diminish or does this reject out of hand the idea of Bitcoin as a safe haven in some way or as a store of value or any of the narratives that there are out there. And I'm interested in your take on that. And I guess one kind of a context is I was watching Pomp interview Mike Novogratz this morning. And Novogratz was kind of, he's been public about how he was surprised at how correlated Bitcoin has been behaved. And he actually thinks that we're going to see at least a 12 to 18 month delay in the narrative of the crypto market as a whole when all is said and done. Because he just, for him, he can't imagine

the new buyers wanting to come in when this asset just kind of seems to not. be doing what some people at least thought it would do. Now, there's a bunch of different takes on that, but I wanted to see what your guy's reaction over the last couple weeks has been. The narrative around Bitcoin itself, if you think about where it's gone over the last five or six years, has always been a shifting concept, right? We went from it being a payments vehicle to then being sort of digital gold and a safe haven. Now what is it? I have always thought that, you know, in risk off moments, that is where, you know, everything is sell, sell, sell, and the problems of leverage, you've got institutions who are borrowing, not necessarily to buy

crypto, but to buy something else, have to sell whatever they can to repay those loans, this mass margin call kind of problem. It was inevitable that crypto would fall in sync with everything else. But I think that then, you know, I had thought that at some point what would happen is, you know, the dust would settle and then the narrative would arise that, okay, now that now that everything's sold, what I want to own as a hedge. against the tension kind of fall out and breakdown in the way that gold has traditionally been. And it's been interesting to watch the fact that gold has fallen as well, right? So it's just an indication of how scared everybody is.

But I do think that whether we call it a safe haven or a kind of a bet on a different world, you know, this is going to be an absolutely transformative event. I think the best analogy is not the financial crisis in 2008. to be dramatic, but it truly is closer to World War II, hopefully not in terms of the violence that might ensue from. And I don't think that's necessarily the point, but the decoupling of countries, the sort of breakdown of globalization, the sort of disharmony in the world and the absolutely massive all over the close shock to the supply chain systems, all of that is going to just leave the world wondering what the hell to do next. And I think in that environment, the dollar as the sort of

the fulcrum of the global financial system. is really put into question precisely because of the combination, if you like, of that problem with the fact that there are technological alternatives to that model. At some point, in this moment when the world says, all right, what next? Bitcoin starts to look really interesting, right?

As a digital alternative, as something that cannot be shut down, as something that stands in contrast to the national structures that we're dealing with, it doesn't mean it becomes the world's reserve currency or the world's payment currency or anything, but that it stands there as an alternative to that. Does that mean it's a safe haven? Or does that mean that it is a different kind of depoliticized version for what our monetary world is going to look like?

When does that happen? I don't know. That's the way I think that we can imagine it. I'm sure there's all sorts of other competing feces out there. I have an article coming out on CoinDest today in which I looked at the last time, Bitcoin fell by this much, and I compared it to this time. And it's actually really informing. It tells us that it's the market evolution that has led us to where we are today. The last time Bitcoin fell by more than 35% was in April 2013. And back then, it fell by 50%, almost 49%, in one day.

And that was because it had gone up by three times the previous two weeks or something like that. There was a profit-taking story. Everyone in the market back in 2013 believed in the story They cared about the narrative. Sure, maybe some of them were sellers, but they all had taken time to understand what Bitcoin was all about. And it was an entirely Bitcoin isolated crash. The S&P did absolutely nothing that day. The gold's the same.

But fast forward to now. And it's not about Bitcoin at all. It's about the markets. It's about panic. And Bitcoin was caught up in the general exit of investors from anything that could be redeemed for fear. And that shows that Bitcoin has grown up. that shows that Bitcoin is now part of the broader financial market.

And that's what we wanted. That's what we wanted all along. And this is what happens when it becomes part of mainstream finance. I'm not saying it's part of mainstream finance yet, but that is kind of what we've all been working towards to get this accepted by the bigger funds, to get this accepted by mainstream finance. And so it is going to be caught up in big mainstream events now that it is part of the grown-up world.

I think that's a great way of putting it. This is part of the natural fallout of two years of evangelizing. This is something that if you believe get off zero or 1% allocation or whatever, that's going to be one of the things to go to. So I agree with that entirely. So I won't ask you guys for any predictions. Obviously, we are all in uncharted territories. But what are you watching for this week?

What signals are you looking at? I'm worried about the funds in the crypto sector and funds broadly. I'm worried about funds because when we start to see big fund liquidations that sends an entirely different signal, it also does change market dynamics. Yeah, I mean, I'm looking for, you know, the classic signs of capitulation you often see in these environments. I'm not sure that that term is as easy to apply to something that is just so multifaceted and therefore there are constant cascading effects. But in theory, right, everything has its price and, you know, looking whether it is at Bitcoin or looking at just markets in general, there are going to be people saying,

is this the time to get in? Like, is this where there is enough blood in the streets to use that horrible analogy to buy? Because, you know, how bad can it get? And because as a society, we will come together and resolve this. I think this is what's interesting about this question. It's like, it used to be, don't worry about it. The Fed will solve this. And therefore, that would be the trigger for people to come in and buy. The fact that they knew that the authorities would be behind it. To our original point, we're not sure that's the signal. I'm seeing an incredibly more cohesive understanding. The world is cutting to understand the actual nature of the problem. We're seeing social distancing actions and all sorts of things that may well have significant

impact on improving the actual outlook for this epidemic. And that in itself, not Fed actions per se or anything like that to rescue the market, but literally good news around the potential. potential trajectory that this thing might go on, that's the sort of thing that could just be a trigger, you know, that we are actually coming together and figuring these things out, that it'll be a by signal, not that it's the worst is behind us per se, but there's just even an understanding that we do have the resources, that we have the ingenuity, we have the willpower, we have, you know, could go for ages on that issue, but who's going to get in and buy right now? What are the signals? I suppose, that's the ultimate question.

Listen, it's a terrible and kind of cold comfort, but I do think, that you can't solve a problem until you admit having one, and at least we're starting this week off admitting we have one. So all right, guys, thank you so much for your time today. We'll keep checking in on this, I'm sure, as it's not going anywhere.