One year after the Fed staged a rescue for the global economy, the question of its moral hazard almost seems gratuitous. The reality is, there aren’t any viable alternatives.
The Federal Reserve’s rescue of the global financial system one year ago prevented a public health crisis from degenerating into market chaos. When histories of the Covid-19 pandemic are written, it would be shortsighted to ignore this exercise in financial diplomacy that cemented the dollar’s role as a pillar of the world economy.
This flexing of monetary muscle raises big questions about the world’s dependence on the greenback and the moral hazard it implies. What if the U.S. decides it no longer wishes to shoulder the responsibilities that come with being a global lender of last resort? For all the allure of the America-in-decline narrative, the world has few alternatives.
In late March 2020, the Fed dramatically expanded the supply of bucks to foreign central banks. It did this by opening dollar-liquidity swap lines with nine overseas monetary authorities, including those of Singapore, South Korea, Australia and New Zealand. (The Fed had existing deals with the U.K., euro zone, Japan, Canada and Switzerland.) It also established a program that allowed more countries to temporarily exchange U.S. Treasury notes for dollars.