Before the Federal Reserve Act was passed, the US Govt finances were very much like a household's. B/c of the gold standard, the government could not create money at will. Thus, it was very much subject to market discipline.
That is, the interest rate that US govt got in the markets was very much determined by perceptions about risk and government's ability to repay. The govt also directly competed with private sector for a scarce amount of credit which lenders could provide.
Thus, on average, higher deficits drove interest rates up, which was harmful to businesses and households trying to get credit. Liquidity and interest rates were very volatile. Every 5-10 years there was a major financial panic.
Things came to head in the 1890s and the early 1900s. In 1895, two years after a financial panic pushed the nation into deep recession, the US government itself was bailed out by JP Morgan. In 1907, the same man organized a 'bond syndicate' to rescue the banking system.
In both instances the US government was completely impotent. It would have needed to borrow money to intervene in a forceful and adequate manner. But who would lend to a government whose own solvency is at question due to an economic depression?
The US government was literally hostage to a small group of wealthy individuals, who twice came to rescue in a span of 12 years, but might not repeat the kindness. Then something amazing happened. Washington took its power back. The Federal Reserve System was born.
The US government permanently ended the questions as to its own solvency. From now on, it would borrow in US dollars which it alone created via the Federal Reserve (the Fed). Insolvency was impossible. Maturing bonds could always be redeemed by issuing more dollars.
This act was a massive transfer of power from the market to the US govt. No longer could the 'bond vigilantes' bully the US government into cutting spending by threatening to dump bonds. The Fed could always intervene.
Some feared that a lack of market discipline might unbind politicians, who would spend money without regard. This would risk high inflation. A 'safe guard' was put into place. To this day, the Fed is prohibited from purchasing Treasury debt directly from the Treasury itself.
It could and does however, purchase Treasury debt on the secondary market. This has some legal significance, but there is no economic difference. Alas, most politicians are lawyers not economists.
The Fed can and does DIRECTLY FINANCE buyers and sellers of US govt debt (dealers) in order to make sure that the US Treasury can ALWAYS SELL DEBT! That's what the Fed did in the past few days to make sure that the US govt could keep issuing debt smoothly during the crisis.
Mechanically, the Fed lends money to bond dealers against their existing inventory of bonds so that they can bid at Treasury auctions (which some of them are legally required to do)
That's why, despite this phony legal constraint, the Fed is financing the Treasury. We are printing money to pay our bills, and that's business as usual. Been going on for decades. Nothing nefarious, nothing shady. The US govt can't go bankrupt and that's good thing!
Obviously, the dealers get to skim some money off the top for themselves and that's no bueno. But Congress needs to amend the Federal Reserve Act so that we can end this farce. But things still need to work until it does. Given the circumstances, the Fed did the right thing.
If you want M4A or to cancel student debt, and you want to do it by increasing the deficit, get Congress to approve the spending and the Fed, via the exact same mechanism, with make sure the new debt sells in the market place at reasonable prices.
But remember, too much deficit spending will push up inflation, which creates its own problems. So we still need some taxes. However, given the low levels of inflation in the past few decades, higher deficits probably don't present much inflation risk in the current environment.
Lastly, let's compare what's happening in the United States, which has a system which precludes govt insolvency, to what's going on in Spain and Italy, countries which gave up their central banks (Their versions of the Fed) when they joined the Euro.
Bond yields for both nations are surging. Investors are rightly worried that with looming economic collapse, they won't be able to pay their bills. But we see no surge in yields in the US or South Korea. In fact, bond yields in the US are at record lows.
We can have nice things. We don't need to worry about the government going bankrupt. We do need to worry about to much deficit spending causing inflation. And we should amend the Federal Reserve Act so that the Fed can just give $ to the Treasury and cut out dealers. Fin.
