Fed’s Coronavirus Rescues Invite Bigger Bailouts

The Federal Reserve has responded aggressively to market strains and the sharp drop in the economy caused by the coronavirus pandemic. The central bank cut short-term interest rates nearly to zero, bought hundreds of billions of dollars of Treasuries and mortgage-backed securities and it introduced a plethora of special liquidity facilities designed to support markets. The Fed’s actions have largely worked, easing financial conditions and enabling corporations and municipalities to borrow in the U.S. debt markets. If I were in the Fed's shoes, I would have pushed for the same forceful interventions.

That said, the Fed’s actions have a cost because they tend to encourage risky behavior that we want to avoid -- a problem known as moral hazard. Not all of those who got help were blameless.