Lots of voices missing the mark: the fed is acting to keep the corporate bond market from seizing up.<p>Corporations finance part of their borrowings through bonds. These bonds need to be paid in full + the interest when the bond matures. Corporations and banks typically repay some of these from cash, and some by issuing new bonds.<p>Right now no one is getting to issue new bonds at all. Banks cannot lend because the risk rating on these bonds has gone up, meaning they in-fact need to sell said bonds to reduce their risk exposure.<p>Thus the FED is acting as a lender of last resort directly to major corporations. Without this last resort said corporations would need to either fire-sale off assets to pay the principle on these bonds or face a technical default.<p>Covenants on their other bonds mean that if the corporation defaults on any of their bonds, all of the bonds become callable. It is 110% not good to have any major corporation go into a technical default. We are talking about companies which have plenty of assets and strong businesses.<p>Thus the Fed and US Government are/should be acting to avoid any such rapid deleverage. It took Japan 2 decades to reduce leverage in the corporations. Without intervention the US could undergo this same deleveraging in a matter of months. It would throw the American people into such a deep poverty the likes of which we've not seen since the great depression.<p>Which is to say: these bailouts are going to happen. No one who understands what is at stack would choose to "let the house fall".
Every decade or so, with regularity, the world seems to go through a significant economic or financial crisis triggered by some or other "unexpected" shock:<p>* The current crisis, starting now, in 2020;<p>* The global financial crisis from 2008 to the early 2010's;<p>* The dotcom, telecom, and tech bust of the early 2000's;<p>* The Asian debt crisis of the late 1990's;<p>* The Latin America debt crisis of the 1980's;<p>* The oil shock and stagflation crisis of the 1970's;<p>In each of these crises, a significant swath -- or all -- of the world's financial infrastructure has <i>seized up</i>, requiring government intervention to prevent collapse.<p>A natural question to ask is whether the financial infrastructure we have today has been well-engineered to be robust to these remarkably regular shocks.<p>Judging by the regular seize-ups, it doesn't seem to be.
How does injecting money solve a problem that’s not caused by lack of money? This market downturn isn’t a lack of liquidity, or a lack of money, or toxic assets like the mortgage backed securities.<p>People aren’t going to stores, restaurants, and airlines because of SARS-CoV-2, not a lack of credit or money.<p>Printing money isn’t going to create customers for businesses effected by this pandemic.
I fail to understand why any economist would prefer QE over helicopter money. Give everyone a check. If they need it to purchase everyday goods and services, great. If their everyday needs are fulfilled already, they will invest that money into stocks, bonds, treasuries, etc, adding the needed liquidity to the market.<p>I understand if you're against the idea of giving people money. But this is just giving money to mostly the rich. Neo-trickle down economics.
So the Federal Reserve is admitting to a Martingale strategy. Interestingly they’re the one entity on the planet that can pull it off at scale.<p><a href="https://en.wikipedia.org/wiki/Martingale_(betting_system)" rel="nofollow">https://en.wikipedia.org/wiki/Martingale_(betting_system)</a>
> Several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor.[9] The meeting included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin, head of the Chase National Bank; and Charles E. Mitchell, president of the National City Bank of New York. They chose Richard Whitney, vice president of the Exchange, to act on their behalf.<p>> With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As traders watched, Whitney then placed similar bids on other "blue chip" stocks. The tactic was similar to one that had ended the Panic of 1907, and succeeded in halting the slide. The Dow Jones Industrial Average recovered, closing with it down only 6.38 points for the day.<p>— <a href="https://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929" rel="nofollow">https://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929</a>
Awful policy. The fed needed to hold off on this and the previous rate cut until Congress finally passed a useful bill. Powell had all the power to force Congress to act and he's blown it again.
> The Fed will be moving for the first time into corporate bonds, purchasing the investment-grade securities in primary and secondary markets and through exchange-traded funds.<p>The only step remaining is for the Fed to begin buying stocks. The Bank of Japan has been doing this (by buying ETFs) for some time now. That bank now owns ~80% of the Japanese ETF market.
So: my investments remain in very bad shape, inflation skyrockets, meaning my current net worth as well as future earnings are far lower. What does this help someone in personal terms?
It seems like at some point you have to let a wound bleed. If we keep bailing out bad investments every black swan event, you're never allowing for a correction. Eventually the accumulated amount of bad business would be too much for the gov't to save. To borrow from biology, it seems like we're constantly interfering in the process of autophagy.<p>Unfortunately there's no political capital to be saved with such a decision.
This warning is from the Bible, written well over 2,000 years ago.<p>"Woe to him who accumulates what is not his—For how long?—And who makes even greater his own debt! Will not your creditors rise up suddenly? They will wake up and violently shake you, And you will become something for them to plunder" Habakuk 2:6,7<p>Every financial crisis in recent memory is caused by excessive debt by some party.<p>- Consumers
- Homeowners
- Financial institutions
- Corporate institutions
- Governments<p>It's stunning how poorly this problem of excessive reliance & use of debt has been tackled by governments and regulators.<p>That, despite debt being well known as a source of financial meltdown for centuries!<p>Even with all the research, regulations, and rules on the book, this well-known problem of recurring debt crises has remained unsolvable by world leaders.<p><a href="https://wol.jw.org/en/wol/d/r1/lp-e/101989322#h=8" rel="nofollow">https://wol.jw.org/en/wol/d/r1/lp-e/101989322#h=8</a>
A major change that's gone at least partly unreported: since 2008 we have made the final steps toward a fully backstopped market. The market before was always somewhat backstopped, but now I think it's safe to say that everything big is backstopped.<p>That means we've moved toward a financial system with one single point of failure at the top. It's got quite a lot of mass and weight, but if it fails everything else does. This is not dissimilar from the Chinese model, which means America is now (perhaps unintentionally) copying China.<p>This also means short sellers should beware: even if you are nominally correct, the market may defy your logic because something else is backstopping everything.
Spend 11 years buying back stock instead of saving anything then immediately bailed out at first sign of trouble.<p>Private profit, public risk. 'Tis lame.
Keep in mind they're only able to buy US treasuries and mortgage backed securities. If Congress changes the rules to allow the Fed to purchase stocks, we'll be in for some very interesting times. It could be that we get an economy of zombie companies, or valuations soar beyond what we've come to expect as normal. In any case, this is unprecedented and in my opinion not the right move. They're sacrificing our future in order to inflate stock prices now so that the current president can get re-elected.
”When there is pressure for leaders to respond to problems or crises, they often simply intensify their efforts in their particular defined sphere of activity – even if that’s not relevant to the real problem. To do otherwise requires taking on entrenched practices and asserting power in areas where it often will not be well received. And leaders tend to see major crises more as threats to their own position rather than as systemic challenges for the societies that they govern or the institutions that they manage.<p>Frenzied grand constructions, wars and great rituals are among the common responses of ancient leaders to crises. These demonstrate powerful responses by the leaders (enhancing their threatened hold on power), but almost never really address the problems themselves. A cynic might characterize the giant U.S. stimulus bill of 2009 as such an effort.” -Arthur Demarest
After the crisis is over, they’ll just do the same thing again, inflate a new bubble, faster this time, which will once again explode, and bail it out again on the backs of working Americans. There’s no learning curve at all. They think the problem is that they didn’t inflate the bubble fast enough and with enough leverage. But, this is probably what we should expect. It’s a repeated pattern throughout history that when things go wrong, leaders usually don’t try new approaches- instead they just keep doubling down on what they were doing before, thinking that the problem was that they just need to do whatever they were doing before, but more. It takes a total collapse, historically, for true behavioral change to occur. The whole society, like a drug addict, has to hit rock bottom.
I'm afraid this is another wealth grab similar to 2008 but x10 bigger. What was an international health emergency turned into another large scale robbery of the common folks.
This is a recipe for stagflation -- economic slowdown (inevitable, and by choice, in response to the circumstances) with excessive liquidity in the market. The capital injections aren't going to open up restaurants until shutdown orders have been lifted, and even then, you're kidding if you think small businesses will materially benefit from Fed actions.
I'm reminded of this story of the Federal Reserve on 9/11: <a href="https://www.dailykos.com/stories/2014/09/10/1328813/-The-Astonishing-Story-of-the-Federal-Reserve-on-9-11" rel="nofollow">https://www.dailykos.com/stories/2014/09/10/1328813/-The-Ast...</a>
Can anyone with a better economic understanding share their thoughts on how viable this is? From a layman's point of view, it seems like the FED are using up a lot of their arsenal very quickly.
I like how socialism's used to save capitalism, yet you'll still have people claiming capitalism its the only system that "works".<p>Yes, it "works" because it has to, i.e. there's no defined scenario of it not working, apparently nor the Great Depression, nor 2008, nor measures like these still don't mean anything as far as it not working, so it works because it apparently never does not work, no matter what.<p>P.S. I don't mean to claim capitalism 100% does not work and socialism does, merely that maybe we need a healthy mix of both?
If a meteor was headed for the earth tomorrow, the president would get up in front of the nation and say, “my fellow Americans, we have created 100 trillion dollars of imaginary money in a database in upper Manhattan, so everything will be fine..”