[HN Gopher] Fed to buy junk bonds, lend to states in fresh virus...
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Fed to buy junk bonds, lend to states in fresh virus support
Author : toomuchtodo
Score : 129 points
Date : 2020-04-09 14:30 UTC (8 hours ago)
(HTM) web link (www.bloomberg.com)
(TXT) w3m dump (www.bloomberg.com)
| aazaa wrote:
| > Its Secondary Market facility may purchase U.S.-listed ETFs.
| While the preponderance of those holdings will be those primarily
| focused on U.S. investment-grade corporate bonds, the remainder
| will be in ETFs whose primary investment objective is exposure to
| U.S. high-yield corporate bonds.
|
| In other words, the Fed is buying junk bonds through ETF. There's
| one more stage to go: buying equity ETFs, like the Bank of Japan
| has been doing for years.
| jmcqk6 wrote:
| >There's one more stage to go: buying equity ETFs, like the
| Bank of Japan has been doing for years.
|
| People keep saying this, but what is the chain of logic for the
| fed getting into equities? They aren't in freefall. They've
| been rallying for the last two weeks.
| OscarCunningham wrote:
| The Fed's mandate isn't to prop the market up; it's to keep
| the value of money steady. They're pumping money into the
| system to prevent deflation.
| rmrm wrote:
| The market tends to want to test assumptions it seems to me.
| I would not be overly surprised to see the market act in a
| fashion to have this question if the Fed will backstop it
| answered.
| aazaa wrote:
| The global dollar short squeeze [1], if left to unfold, will
| drive the dollar to highs that will paralyze the US and world
| economy. The Fed will combat this problem through aggressive
| devaluation. This devaluation will take the form of moving
| privately-held assets onto its balance sheet through
| purchases.
|
| Taken far enough, this program will leave the Fed without
| Treasuries to buy. To diversify the flow of assets onto the
| balance sheet, ever riskier assets will be purchased. Today
| it's junk bonds. Tomorrow it could be stocks.
|
| [1] https://www.lynalden.com/global-dollar-short-squeeze/
| jmcqk6 wrote:
| That is an amazing link, thanks!
| acchow wrote:
| The fed has instituted infinite QE and we have a dollar
| short squeeze? Unlikely.
| snarf21 wrote:
| The Fed frequently plays the role of buyer/lender of last
| resort. Some of it is signaling to help prop up the market
| and the Fed hopes to sell later at a profit.
| AngrySkillzz wrote:
| There's no justification for it, people are just speculating.
| The BoJ buys equities because of long-term structural issues
| with the Japanese economy (e.g. low birthrate, low
| immigration, aging population) that cause deflationary
| pressures in all asset classes. The current situation in the
| US is nothing of the sort.
| Patentlywong wrote:
| This is factually incorrect... I cannot believe that I'm
| actually making use of my polisci double major but your
| understanding of the word is missing YUGE parts of economic
| history such as:
| https://en.wikipedia.org/wiki/Lost_Decade_(Japan)
| vkou wrote:
| The market isn't rallying because investors are becoming
| optimistic about the prospects of the real economy. The real
| economy is going to be a disaster, because we have no roadmap
| for leaving lockdown anytime soon.
|
| It's rallying because all sorts of zombie businesses can now
| stay alive, thanks to the government lending them unlimited
| amounts of money.
|
| All this does is it kicks the can down the road for a year.
| NopeNotToday wrote:
| > but what is the chain of logic for the fed getting into
| equities?
|
| People are still dying. The government has to take action. /s
| whatok wrote:
| The Fed is buying a limited universe of high yield by issuers
| that were recently downgraded. The cutoff date happens to
| coincide around where Ford got downgraded. They are not (at least
| currently) buying wider universe HY. The HY ETF purchases are
| last in their purchase waterfall. Limited HY for "fallen angels"
| makes sense as these corporate facilities were announced a while
| ago and did not have much details at the time.
| blackrock wrote:
| The recession is cancelled.
|
| Let the new dawn of Infinite QE begin!
|
| ===
|
| Let us give thanks to the the Fed. They just impoverished all of
| us. Because of this, then the rich will just keep getting richer.
| The oligarchs of America wins again.
|
| What should you learn from this? Take out cheap low interest
| loans to buy up assets. Your dollar just got cheaper, while all
| prices will go up. In 10 years, your $700,000 USD house, will be
| priced at $1,400,000 USD.
| jgacook wrote:
| Ah we begin the long journey of having a system so politically
| broken that the central bank must command its balance sheet to
| stop the rotten structure from collapsing, a la Weimar Republic
| or Zimbabwe.
|
| This liquidity isn't a life boat. It's propping up corporations
| and people who have been dangerously over leveraged for years and
| who are beginning to become habituated to the notion of getting a
| government bailout when times get hard.
|
| To the enlightened HN participants proclaiming that this is a
| necessary step to save an ailing economy facing an unprecedented
| crisis, consider the following:
|
| 1) this crisis was not that unprecedented and many companies had
| large enough balance sheets that they were able to weather it.
| Why are we rewarding corporate mismanagement? Have any of the
| corporations eligible for asset filed for bankruptcy or attempted
| an asset selloff to recover some liquidity?
|
| 2) the Main St. loan pool is much smaller than the Wall St one.
| Why do we expect smaller businesses to be better able to weather
| this crisis?
|
| 3) what is this cash infusion actually doing to tackle the
| exponential rise in unemployment? How does it help the taxpayer?
| It's not going to stimulate consumption in people who have lost
| their jobs and kickstart a recovery - the unemployed will likely
| be unemployed for months to come and the loan recipients will
| likely be so saddled with debt at the end of this that they won't
| experience growth again for years. There's no mandate that
| companies receiving emergency loans have to maintain their
| current workforce. The taxpayer receives no equity in the
| companies they have gone into debt to save.
|
| 4) given the size of these loans we may well be in another
| recession in 10-20 years and still have the majority of these
| loans outstanding. Do we then forgive these loans when the usual
| suspects need another round of cash infusions?
|
| 5) the Fed has set interest rates close to rock bottom for the
| better part of a decade (and backed down from raising them last
| year when Trump threatened bloody war) leading to a massive asset
| bubble and a business climate addicted to cheap liquidity. The
| message this bailout sends is that corporate over-leveraging is
| rewarded with a cash infusion, but god help the individual who
| took out a mortgage, car loan, etc. and lost their ability to
| keep up payments from coronavirus unemployment. Why is one type
| of entity granted access to public money in order to be spared
| from their bad decisions?
|
| The scale of this debt is almost unfathomable and adds to an
| already overloaded Federal Reserve balance sheet. Other
| commenters have rightly pointed out how precarious this situation
| is in the longer term. I'm more worried about the callousness of
| the average person on this issue. American economics are so
| polluted with worship of great titans of business that nobody
| really seems that concerned that millions of Americans are facing
| perhaps permanent homelessness and long-term unemployment in the
| next few months.
|
| Pumping failing businesses full of cash when millions of our
| citizens are struggling to buy food should not be normal. It is
| not a stepping stone of necessity to preserve our way of life. It
| is a choice to use capital to violate perhaps the most central
| tenet of capitalism: businesses must face the consequences when
| the punch bowl runs dry. This is socialism for corporations and
| we're all footing the bill.
| rsanheim wrote:
| Thank you for this explanation. So much of what I've been
| reading about the fed / stimulus response has felt rotten to
| the core, but I've lacked a clear explanation for exactly why.
|
| It's impossibly l to know how this will all play out over the
| next several decades, but the house of cards is teetering
| dangerously and when it crashes, it will be a tremendous fall.
| cryptica wrote:
| Does the Fed buy from the public too? I have high quality junk
| bonds to sell them... Extra junky; just as they like 'em.
|
| My junk bonds are way better than Goldman Sachs'... Goldman Sachs
| couldn't make a junk bond if they defaulted on it!
| londons_explore wrote:
| What are the chances the fed makes money overall on these junk
| bonds?
|
| Buy enough of them and you might prop up the economy long enough
| for the bonds to come to term and be repaid.
|
| Buying any one individual bond would have been lossmaking, but
| buying in such volume proves profitable due to a kind of network
| effect?
|
| Is this likely/possible? Is it possible someone other than the
| fed could have done this? Like maybe a foreign government (China,
| EU, Saudi Arabia)?
| beamatronic wrote:
| Absolutely
| mywittyname wrote:
| Don't be surprised if there are provisions in the agreements to
| socialize the losses and privatize the profits. Like the
| ability to buy back the bond at original value at some point in
| the future, or some kind of "service agreement" that allows the
| bank to retain some of the interest payments.
|
| We can already see this by the fact that the bond market has
| surged, pretty much guaranteeing that the Fed is going to
| overpay for these bonds.
| tren-hard wrote:
| Is a pure political move? At least watching the daily WH meetings
| this seems to be priority numero uno. Doesn't this cause more
| problems in the long run propping up businesses that can't
| survive two months without a bailout, err loan?
|
| > Loan sizes will range from $1 million to $150 million.
|
| $150 million is obviously no longer about protecting employee
| payrolls like these business relief loans started out with.
| whatok wrote:
| These are for companies that have either up to 2.5bn in revenue
| or 10k employees. Do you know how much payroll is for companies
| of that size?
| froindt wrote:
| To put some guesstimates on it:
|
| Say 50k average cash compensation (low for tech, but most
| businesses aren't tech). Health insurance, social security,
| medicare, 401k match, etc. would add to this number.
|
| 10k employees * 50k/year / 12 months = 41.6 (repeating of
| course) million per month.
| mywittyname wrote:
| > Doesn't this cause more problems in the long run propping up
| businesses that can't survive two months without a bailout, err
| loan?
|
| Yes. This is why I anticipate the effects from this to be
| dramatic, horrendous, far-reaching, and long lasting.
|
| This administration's stance on the economy is to do whatever
| it takes to ensure certain businesses don't go under. Up to and
| including straight up, permanent corporate welfare. This
| started with the collapse of the fossil fuel industry due to
| the glut of cheap natural gas, then continued when the trade
| war devastated our agricultural industry. I am certainly not
| surprised to see the government extend this policy to basically
| every business in the US.
|
| The big problem is there seems to be no oversight or incentive
| for these business to keep going. Dairy farms are dumping milk
| down the drain and reducing herd sizes because there's no
| market for their products. Why would we just continue to pay
| them to produce nothing? You could get much better outcomes
| through the government buying up the end products and
| distributing for free to people in need. Remember "government
| cheese"? Bring back government cheese.
|
| I completely expect this situation to spiral out of control and
| become an epic disaster. This is going to be a 10-trillion
| dollar suicide. We are paying companies to literally stop
| operating, and we are pissing off all of our long-term allies
| at the same time. Don't be surprised if these countries are
| shrewd negotiator when the US comes crawling to them for aid.
|
| I bet we'll still be discussing this come the 2024 election...
| vladimirralev wrote:
| That's pretty outrageous without presenting an economic model
| that justifies the decision at such volume. Are they picking
| winners and losers or are they really optimising something? No
| way to know.
| xiaolingxiao wrote:
| How does this impact someone like AirBnb? Other commentators made
| note of the fact that its loan with 10% interest rate is
| essentially non-investment grade. If the fed will buy junk bonds,
| does this prompt lenders to issue more of such instruments,
| thereby allowing companies like AirBnB or WeWork to float for as
| long as the Fed buys?
| bediger4000 wrote:
| Which states? That's a legit question these days. I live in
| Colorado, can I count on some of this stimulus? Maybe. If I lived
| in California, probably not.
| whatok wrote:
| I haven't had time to read through the muni details but they
| are linked below. As far as I know, every city/state qualifies.
| There's just restrictions on pricing vs rating and size vs
| previous outstanding.
|
| https://www.federalreserve.gov/newsevents/pressreleases/file...
| thomashobohm wrote:
| Any state that wants a loan can get one. This isn't really a
| "stimulus" per se; the Fed is just ensuring that states facing
| short term liquidity issues can continue operating. To solve
| the broader structural problems at play, the government needs
| to step in with some fiscal stimulus.
| quxpar wrote:
| Sure, and anybody who wants a covid-19 test can get one.
| neonate wrote:
| https://archive.md/IuHN0
| AnimalMuppet wrote:
| You want to give us some clue of what this points to, and why
| we should bother to care? No, I'm not going to click on it to
| find out. _You_ presented the link; take a few seconds to tell
| us something, rather than expecting 10,000 people to go
| investigate for themselves.
| cs702 wrote:
| The US Federal Reserve is openly _buying crap_ (junk bonds!) and
| _wildly overpaying for it_ without pretending otherwise.
|
| Its balance sheet will have grown by as much as _an order of
| magnitude_ by the end of the month, far above any levels seen
| during the global financial crisis of 2008. (If you don 't know
| what this means, think of the Fed's liabilities as "all forms of
| money issuance.") It's issuing fresh money to buy crap from the
| people who are stuck holding it. The sellers will come out whole,
| the buyer -- i.e., the US government -- will suffer the
| losses.[a]
|
| Meanwhile, the US Treasury is borrowing and trying to spend on
| the order of an additional 10% of GDP as quickly as possible,
| increasing the US federal deficit and borrowings by that much as
| quickly as possible.[b]
|
| And all of this is _urgently necessary_ to prevent economic
| collapse in the US. _Urgently necessary_.
|
| We are in uncharted waters.
|
| [a] You'll see it here: https://fred.stlouisfed.org/series/WALCL
|
| [b] You'll see it here:
| https://fred.stlouisfed.org/series/GFDEGDQ188S
| coliveira wrote:
| The signal the Fed is sending to everyone in the market is:
| don't worry about risk or bad decisions! As long as you are in
| the same boat as other financial institutions, the Fed will
| rescue you. Even if we survive this new crash (I still remember
| 2008), the economy seems to be headed to destruction in not
| such a long term.
| AngrySkillzz wrote:
| Not "buying crap," we are talking fallen angels AKA companies
| that were previously rated investment grade that have been
| downgraded due to the crisis. "... rated at least BBB-/Baa3 as
| of March 22, 2020 ..." in the press release. It's not like the
| Fed is buying WeWork bonds, just closing a loophole in the
| previous investment grade bond buying facility to cover bonds
| that were recently downgraded. Which is kind of the point,
| extending credit to otherwise-strong firms that are impacted by
| the social distancing measures.
| A4ET8a8uTh0 wrote:
| The fallen angels is an interesting construct. At the end of
| the day, their ratings are considered junk. Classifying them
| as crap is appropriate. Without serious infusion of cash
| there is a notable nonzero change they would fail. What is
| the point of those ratings if they are being ignored at the
| first sign of trouble?
| foota wrote:
| There's a difference between a company that has always been
| junk and a company that is only rated junk because of the
| current crisis?
| ipsum2 wrote:
| > Without serious infusion of cash there is a notable
| nonzero change they would fail
|
| This is an exaggeration. Many companies purposely have junk
| bonds so they can borrow more money at a low rate, compared
| to investment grade bonds.
| A4ET8a8uTh0 wrote:
| Yes. Their purpose is to have funding. Do you think they
| pay higher interest rates out of the goodness of their
| hearts? I am not sure what you are arguing here.
| elliekelly wrote:
| Recent history has shown that the ratings are calculated as
| a function of politics, market psychology, and the rating
| agency's best hunch.
| toomuchtodo wrote:
| You are no longer "otherwise-strong" if you have been
| impacted by COVID economically. The economy pre-pandemic no
| longer exists. It will not magically exist again in the
| future.
|
| The Fed buying junk bonds is "extend and pretend". If you
| want to save the jobs, allow overextended firms to fail, and
| then bail them out with the government taking ownership
| (while removing management). We did this with GM in 2008: we
| saved the jobs, we removed management, and we wiped out
| existing equity owners.
| jrockway wrote:
| I don't think this is the right approach. Look at the
| airlines, for example. They own/lease super expensive
| machines that need to be in the air filled with paying
| customers to make the economics of being an airline viable.
| Travel is now essentially banned, so they can't do that. It
| is likely that when the pandemic is under control, people
| will again want to ride airplanes to far-away destinations.
| So it seems reasonable to me to provide some sort of
| financial help to the airlines alive during this once-in-a-
| century event. They didn't really mismanage their business
| by buying airliners and not planning for a global pandemic
| -- there was simply no way to run the business profitably
| with an allowance for "someday we will be unable to fly for
| 6 months in a row". It seems to me that if society wants
| air travel, which we do, we have to step up and at least
| provide a loan to cover for this essentially-unforeseeable
| event. There isn't a passenger airline in existence that
| planned for this event and is making a profit right now,
| it's simply not an environment that a passenger airline can
| be profitable in.
|
| The government paying for Coronavirus also provides a
| financial incentive to not fuck it up so badly next time.
| We ignored the warning signs and decided to do nothing --
| now it's costing us. Next time, we'll know that mismanaging
| the early days of a pandemic is going to cost trillions of
| dollars, so we'll probably do a better job. (Or rather,
| vote for people that will do a better job.)
|
| (Here's how I think we should have handled the early days
| of Coronavirus. Ban travel and buy back the
| tickets/reservations for all travellers. People were still
| taking vacations even when Coronavirus was widespread. I'm
| guessing they did that because they sunk $2000 into non-
| refundable reservations, and didn't want to be the ones to
| subsidize the airlines. So they took their trip, got
| Coronavirus, infected 3 other people, and now tens of
| thousands of people are dead.)
| jgacook wrote:
| What on earth incentivizes them to not repeat this
| pattern of behaviour if they can rely on a no-strings-
| attached cash infusion?
|
| Middle class Americans are expected to have enough cash
| reserves to survive 2-3 months in case of an emergency.
| Why is this expectation not in effect for an airline that
| makes vastly more profit per capita than the average
| household?
|
| Airlines spent well over 96% of their free cash flow on
| stock buybacks, enriching their boards of directors,
| executives, and shareholders. Do you think it's fair that
| they can make those decisions and still be entitled to
| favourable loan agreements when their mismanagement comes
| back to bite them?
|
| Why do we not let the airlines have an asset selloff of
| their "super expensive machines" in an attempt to bridge
| the coronavirus gap before giving them public funding?
| Could they not declare bankruptcy and restructure
| themselves to survive until shelter in place is over and
| business returns to normal?
|
| Why does the government bailout not have the cash
| infusions come in the form of an equity buyout, thus
| bringing actual consequences to the mismanaged airlines
| and bringing a more stable guarantee of investment return
| to the taxpayers who have funded this bailout? Shouldn't
| having access to socialized coffers come with the caveat
| that your company must become, in part, socialized?
|
| The system only works if companies feel the pain of their
| mismanagement. Any whisper of bailing out the airlines
| without considering the above is disgusting and un-
| American. You don't get to privatize profits and
| socialize losses. History has shown that companies do not
| learn lessons unless they are allowed to fail.
| kortilla wrote:
| > Why is this expectation not in effect for an airline
| that makes vastly more profit per capita than the average
| household?
|
| Wtf does profit per capita than an average household even
| mean?
|
| Also, profit is irrelevant if we're talking about a super
| capital intensive business that can't scale back its
| expenses when the revenue goes away (which is the case
| for all of these airlines leasing planes and paying
| employees).
| jacques_chester wrote:
| > _Middle class Americans are expected to have enough
| cash reserves to survive 2-3 months in case of an
| emergency. Why is this expectation not in effect for an
| airline that makes vastly more profit per capita than the
| average household?_
|
| Individuals and households have tremendously higher risk
| variability than companies, because most of the time
| there are only one or two major sources of income. When
| one or two of those incomes are interrupted it blows a
| giant hole in household cashflow.
|
| A large company, however, is not dependent on individual
| relationships with sources of income. Each customer is a
| source of income, there are potentially millions of them.
| Losing 1 or 10 or even a thousand customers doesn't blow
| a giant hole in cashflow. There are correlations in those
| flows, but it's never 1.0.
|
| Until now.
|
| But let's assume we go ahead with the idea that every
| major company should hold 3 months of cash. For starters,
| that's 3 months of _at least_ revenues, which is going to
| be one and sometimes two orders of magnitude larger than
| profits. Assuming that your profit is something like 10%,
| you 're now holding something close to _three years of
| profit_ on-hand, earning approximately bugger-all. Your
| shareholders will lynch you.
|
| But suppose they don't lynch you. Is that the _best_ use
| for your cash? Is it the use that _genuinely_ reduces
| your overall risks? Almost certainly not. You could use
| that cash to pay for more R &D, more equipment, more and
| better-paid staff, improvement programs, to buy promising
| technologies, invest in other companies, pay down loans
| on larger, more modern and more-efficient factories ...
| the list goes on and on. By choosing to hold that cash
| against a catastrophic event, you greatly increase the
| much more mundane, but still fatal to the company, risk
| that you will be out-engineered, out-manfuactured, out-
| marketed, out-sold by competitors.
|
| But suppose that everyone does it anyway. Now another
| COVID-19 style risk hits everyone simultaneously. What
| happens? The first thing that happens is that spending on
| anything that's not immediate ceases. So the money that
| we held back and didn't spend on investing in the future
| becomes joined by cancellation of all similar spending
| out of the rest of our income. So no net gain there.
|
| The rest of the money gets spent on keeping the lights
| on. If there's a crisis big enough to halt the economy
| for 3 months, then it's not really going to halt the
| crisis for 3 months. It will be much longer than that. So
| everyone decides to hoard their cash and begins cutting
| everything, everywhere they can, to stretch it out. So
| the cash doesn't get spent over 3 months, it gets spent
| over 12 months.
|
| But suppose everyone decides to spend at the 3-month rate
| anyhow. What happens next is that everyone's bank is
| suddenly facing a massive simultaneous drawdown in
| capital. They will almost immediately exceed their
| capital limits and now, they have to suspend lending. A
| whole bunch of otherwise companies get killed by the loss
| of credit liquidity.
|
| But suppose we didn't put all of it in cash-at-bank?
| Well, we're still boned. If everyone begins to sell their
| bonds, shares, gold coins and stamp collections at once,
| prices crater. 3 months of reserves is now worth 2 weeks
| on the open market.
|
| You've probably guessed that the only way out of this is
| to pool risks. Normally insurers do this, but insurers
| know that they cannot withstand correlated risks like
| pandemics, so they simply don't insure them (with rare
| and very expensive exceptions).
|
| What we're seeing now is that fiscal and monetary policy
| is being used as "insurer of last resort". It's never
| been done on this scale before. It might never again.
|
| All of which is to say that there's a lot to criticise
| about modern finance and managerial economics, but the
| idea that it's identical to household finances is very
| misleading.
| A4ET8a8uTh0 wrote:
| You forgot to mention that households do not have the
| same level of representation as various industries or
| even individual companies.
| DarmokJalad1701 wrote:
| > For starters, that's 3 months of at least revenues
|
| Why would they need to hold 3 months of revenue? Why not
| 3 months of operating expenses and suspend capex?
|
| > more R&D, more equipment, more and better-paid staff,
| improvement programs, to buy promising technologies,
| invest in other companies, pay down loans on larger, more
| modern and more-efficient factories ... the list goes on
| and on
|
| Does that list include stock buybacks?
| djannzjkzxn wrote:
| It depends on the prospects of the company and how good
| investment opportunity are. For a company in a fast-
| growing market it's probably better to invest and expand
| the empire. For a more mature company it's probably
| better to return the cash to shareholders so they can
| invest somewhere else.
| tathougies wrote:
| > The system only works if companies feel the pain of
| their mismanagement.
|
| This is nuts. Not prepping for a pandemic that causes
| governments to eradicate your business model is not due
| to mismanagement.
| throwaway2048 wrote:
| Bad situations happen, they have happened before, and
| they will happen again.
|
| All bailing out companies does in the long run is ensure
| they run things as close to the line of collapse as
| possible, because if there is any disruption, the
| government will bail them out.
|
| It creates titanic systematic risk, and greatly rewards
| poorly managed companies vs well managed companies.
|
| Any company weathering this storm well might as well have
| never bothered saving money and making long term wise
| decisions that may have limited short term upside, when
| you get a guaranteed bailout when things start going
| south when you have made decisions that lead to having no
| reserve capital (see American Airlines 12 billion dollar
| stock buyback, the airline industry wants a 50 billion
| dollar bailout, having spent 45b on stock buybacks in the
| last years, why would they save money when the government
| will swoop in and pay)
|
| Don't think the individuals running these companies don't
| see the pattern here.
|
| Its akin to betting red on a roulette wheel every time,
| and getting more free money when it comes out black
| instead.
| tathougies wrote:
| No business should prepare for their business to become
| illegal. Air demand is down only partly due to consumer
| behavior. The majority of the demand is down due to
| government action. Your argument is like arguing alcohol
| producers should have prepared for Prohibition.
|
| No the best recourse when your business becomes illegal
| is to grant a large dividend to shareholders before your
| creditors liquidate the company. Preparing for your
| business to become illegal is a waste of money
| salawat wrote:
| >Do you think it's fair that they can make those
| decisions and still be entitled to favourable loan
| agreements when their mismanagement comes back to bite
| them?
|
| Ex-shareholders technically. Remember, stock buybacks
| only generate value when you exit the stock. Technically,
| if you've been holding, you're up shit creek.
|
| >Why do we not let the airlines have an asset selloff of
| their "super expensive machines" in an attempt to bridge
| the coronavirus gap before giving them public funding?
| Could they not declare bankruptcy and restructure
| themselves to survive until shelter in place is over and
| business returns to normal?
|
| Who the hell would buy them at this point? Wealth is so
| consolidated right now it'd be right back in the hands of
| the same people who were incentivizing the behavior in
| the first place.
|
| The rest of your post is 100% spot on though in my
| estimation though.
| toomuchtodo wrote:
| > The government paying for Coronavirus also provides a
| financial incentive to not fuck it up so badly next time.
|
| It absolutely doesn't. Time and time again, corporations
| have proven their shareholders (management as well) will
| simply strip as much value as they can, and leave us
| (taxpayers via government, citizens with devalued
| currency via the Fed and their monetary policy) holding
| the bag with any losses or externalities to clean up.
|
| For example, the Tax Reform Act was sold as incentivizing
| "jobs and investment"; all it incentivized was share
| buybacks [1]. Shareholders and management have proven
| themselves unworthy of trust, or more accurately, public
| and fiscal policy benefiting them that operates on the
| honor system. "Fool me once!"
|
| [1] https://money.cnn.com/2018/07/10/investing/stock-
| buybacks-re...
| _curious_ wrote:
| "The government paying for Coronavirus also provides a
| financial incentive to not fuck it up so badly next
| time."
|
| How so?
| ryankemper wrote:
| I think you should have replied to the parent comment.
| The person you replied to was quoting that so that they
| could argue against it.
| pmoriarty wrote:
| _" it seems reasonable to me to provide some sort of
| financial help to the airlines alive during this once-in-
| a-century event"_
|
| For how long? It's anyone's guess how long the pandemic
| will last. If we're lucky, there could be a vaccine ready
| in 18 months, but maybe we won't be so lucky.
|
| And how much money should the airlines be given, as
| opposed to, say giving money to people who can't afford
| to pay their rent or feed themselves or their families?
| codyswann wrote:
| > They didn't really mismanage their business
|
| Didn't the airline industry spend something like $45b on
| buybacks? And are now looking for $50b in a bailout?
|
| That seems like mismanagement to me.
| eganist wrote:
| > You are no longer "otherwise-strong" if you have been
| impacted by COVID economically. The economy pre-pandemic no
| longer exists. It will not magically exist again in the
| future.
|
| Citation needed for this. The 1920s would seem to differ.
| rednerrus wrote:
| Didn't it take close to 30 years to recover from the 20s?
| elliekelly wrote:
| It also took _four years_ after the Great Depression
| started for the Federal Government to pass the New Deal
| that helped pull the country out of the gutter. As much
| as I wish Congress had moved faster and done more with
| the CARES Act they're still way ahead of their
| counterparts a century earlier.
| dantheman wrote:
| The new deal extended the great depression and it's
| mishandling is extremely well known. Destroying goods to
| drive up prices, centrazlied price fixing, the blue eagle
| program, wage controls, the reason healthcare is tied to
| employment.
|
| The new deal was a failure and caused long lasting damage
| to the USA.
| arcticbull wrote:
| > The economy pre-pandemic no longer exists. It will not
| magically exist again in the future.
|
| That's ridiculous nothing structural has changed about the
| economy. When the doors fly open people will be back to
| work and life will resume as normal, as it always has.
| macintux wrote:
| We don't know when the doors will open. It's reasonably
| certain they won't "fly" open.
|
| If the coronavirus continues to be a major threat for the
| next year or two, which is well within the realm of
| possibility, we don't know what society or the economy
| will look like after.
|
| Worse, we don't know that there _is_ an after. It's
| possible there is no effective and safe vaccine, and that
| social distancing becomes a permanent feature of life.
| at-fates-hands wrote:
| > We did this with GM in 2008
|
| GM was not allowed to fail and then the government took
| ownership of the company. That's not all what happened:
|
| _On July 10, 2009, following Chapter 11 reorganization
| after an initial filing on June 8 2009,[25][26] the
| original General Motors sold assets and some subsidiaries
| to an entirely new company including the trademark General
| Motors. Liabilities were left with the original GM freeing
| the companies of many liabilites resulting in a new GM._
|
| _GM emerged from government backed Chapter 11
| reorganization after an initial filing on June 8,
| 2009.[25][26] Through the Troubled Asset Relief Program the
| US Treasury invested $49.5 billion in General Motors and
| recovered $39 billion when it sold its shares on December
| 9, 2013 resulting in a loss of $10.3 billion. The Treasury
| invested an additional $17.2 billion into GM 's former
| financing company, GMAC (now Ally). The shares in Ally were
| sold on December 18, 2014 for $19.6 billion netting $2.4
| billion.[27][28] A study by the Center for Automotive
| Research found that the GM bailout saved 1.2 million jobs
| and preserved $34.9 billion in tax revenue.[29]_
|
| _Also in 2009 General Motors of Canada Limited was not
| part of theGeneral Motors Chapter 11 Bankruptcy, the
| company shed several brands, closing Saturn, Pontiac, and
| Hummer, while selling Saab Automobile to Dutch automaker
| Spyker, and emerged from a government-backed Chapter 11
| reorganization. In 2010, the reorganized GM made an initial
| public offering that was one of the world 's top five
| largest IPOs to date, and returned to profitability later
| that year.[19][30][31]_
|
| The government did the same thing its doing now. Investing
| in companies on a short term basis to prop them up and
| allow them to continue to operate. Once the economy is
| stabilized, it will cash out its investment(s) like it did
| with GM.
|
| What you are advocating for is not at all what occurred
| with GM.
| aaronblohowiak wrote:
| I think what the person meant in spirit is aligned with
| what happened in practice -- GM's shareholders were wiped
| out and the government (through chapter 11 restructuring
| and investment) ensured it was a going concern and had a
| subsequent IPO (privitization) ..
| jmeyer2k wrote:
| I don't think that's true. This is a true supply shock.
| Nothing fundamentally changed except that there is a
| "short-term" (1-2 years) issue of workers not being able to
| work and consumers not being able to get a job.
|
| In contrast, in 2008, we realized things were being
| criminally propped-up and the economy crashed. Expectations
| were much higher compared to the actual performance of the
| economy.
|
| The job of the Fed is to keep companies from going under
| due to this supply shock. If companies do go under, that
| means that there WILL be long-term problems with the
| economy because we're lowering LONG-RUN supply.
|
| The whole point of the fed is to smooth short-run supply
| shocks so that long-run aggregate supply isn't affected.
| viklove wrote:
| > If companies do go under, that means that there WILL be
| long-term problems with the economy because we're
| lowering LONG-RUN supply.
|
| This is a false narrative. If a company goes under,
| chances are the long-run supply will not be affected
| much, if at all.
|
| When a company goes under, its assets are not burned, and
| its employees are not killed. If there is any long-term
| profit to be made, a wealthy investor will come in, buy
| up the assets at a low price, hire the employees who are
| now jobless, and pick up the torch where the previous
| ownership left off.
|
| A government bailout only makes sense if you own a
| company being bailed out, and you want to stay rich. A
| government bailout is bad for every other American,
| because it introduces an incentive to making poor
| decisions and not planning for market downturns. We
| should not be rewarding bad corporate behavior with a
| bailout, we should be punishing it by letting the
| companies go under so fresh blood can have a try.
|
| We shouldn't be living in a feudal society of fiefdoms
| that are propped up by the federal government. Let the
| market run its course.
| aaronblohowiak wrote:
| Have you jumped into a large old codebase with no access
| to its previous authors or maintainers? The idea that
| selling for parts a company is going to lead to a
| similarly healthy company filling the niche under new
| management is... extreme.
|
| We do need creative destruction and to prevent moral
| hazards.
|
| We also need to prevent mass unemployment and chaos.
| Nationalizing and re-privatizing can do this, but not as
| efficiently as just giving 0 interest loans to patch over
| a temporary "pause" in the flow of money.
| andrekandre wrote:
| > We shouldn't be living in a feudal society of fiefdoms
| that are propped up by the federal government. Let the
| market run its course.
|
| probably wouldn't be much of a problem (letting the
| market run its course) if we had sufficient social safety
| nets in place for workers
|
| but as we all probably know by now, the govt is mostly
| working for those with moneyed interests so, they get
| front and center
| notJim wrote:
| > When a company goes under, its assets are not burned,
| and its employees are not killed. If there is any long-
| term profit to be made, a wealthy investor will come in,
| buy up the assets at a low price, hire the employees who
| are now jobless, and pick up the torch where the previous
| ownership left off.
|
| But all this requires us to re-assemble these things into
| a new functioning company. A company isn't just a pile of
| people next to a pile of assets, it has internal and
| external relationships and processes and culture and on
| and on happening to make it do the stuff it needs to do.
| This all takes time and effort to create. To let it all
| burn down when we need it again in a few months is
| utterly pointless. What we want to do instead is freeze
| it for a little bit so we can thaw it out later.
| darkerside wrote:
| Seems like a better way would be to purchase the actual
| companies at above market rates, prop them up
| temporarily, and then offload them to buyers.
| notJim wrote:
| Or hang on to them and reap the profits and benefits of
| ownership in perpetuity. But letting them die makes no
| sense to me.
| slg wrote:
| You can't assume this problem is only supply side. This
| interruption is going to have long-lasting implications
| on demand because lots of expenses are still piling up
| without businesses and consumers receiving their regular
| income. If you want everything to magically go back to
| the pre-pandemic levels, you either need to waive all
| those expenses or give them money to pay them. Otherwise
| those consumers and businesses are going to be reducing
| spending for the next year plus as they pay off all their
| expenses that are building up during the shutdown.
| DSingularity wrote:
| Why it not preventing a "black swan" event from wrecking
| companies who could have otherwise continued to operate if
| it wasn't for the shelter in place response?
| toomuchtodo wrote:
| Many companies did prepare and don't need a bailout. If
| you don't need a bailout, you don't need to give up
| ownership. Don't devalue a currency because of poor
| management at scale. Otherwise, you're supporting greed
| and kleptocracy with monetary policy.
| Red_Leaves_Flyy wrote:
| "Never let a crisis go to waste."
| imtringued wrote:
| Ok, let's look at a theoretical business that is designed
| to survive a pandemic. Well, what is the biggest problem
| that would affect such a business? Of course, lack of
| customers! If you don't have customers you also don't
| need employees. So you can just fire them! Now that we
| have gotten rid of the first dead weight the next problem
| is that you still have certain fixed costs. All that real
| estate is now empty since you fired all your employees.
| There isn't much you can do except save up money like
| scrooge McDuck. The easiest way to get that money is by
| screwing over your employees during good times. Don't
| give them raises and bonuses. You'll need that money
| during some government lock down. Now the lockdown is
| over and your business survived without needing
| government help.
|
| Maybe you have noticed something. The rich managers don't
| really a give a damn about the lock down. They have a
| huge amount of money and mostly diversified their net
| worth away from their own business. $5 million after a
| 50% stock market crash is still $2.5 million.
|
| That might sound like a huge loss but only when you
| forget to consider that there also exist people that
| aren't managers and they are in the majority. If you lose
| your job that is pretty much a 100% reduction in income.
| If you lose your job you can't just kick out the rest of
| your family to reduce costs. For every manager that is
| seeing his portfolio dip there are probably a dozen more
| non-managers having a worse time.
|
| The bank bailouts weren't actually about bailing out
| banks. The taxpayers were bailing their own money out.
| Dead banks mean your money is gone. It's like video game
| servers shutting down. Your stuff is just gone. The
| managers at the bank probably couldn't care less about
| their customers losing all their funds.
| Apocryphon wrote:
| As discussed before, not only in this thread but in the
| responses to other articles, some of these companies
| should not have wasted their cash on stock buybacks. They
| ran out of their emergency funds, and have only
| themselves to blame.
| A4ET8a8uTh0 wrote:
| Besides the fact that FDIC would have covered those (
| anyone remembers FDIC fridays? ), banks are not servers.
| Your analogy is wrong. If they failed, the disruption
| would be great, but money would not be lost, the houses,
| cars, equipment, factories, people would still be there.
| The bailout was aimed at the real owners in the US. And
| they got it. Simply because golden rule works.
| aaronblohowiak wrote:
| Both money and value would be lost. The former due to
| write-offs (one persons debt is another's person's
| income) and the latter due to disorganization / entropy /
| chaos. The FDIC fund is not able to cover all deposits
| currently and would require massive government spending
| and distribution.
| icedchai wrote:
| A failing bank doesn't mean your money is gone. In the
| US, savings accounts are FDIC insured up to a maximum of
| $250K. If your bank fails, it's likely getting acquired
| by another bank anyway. Customers have value.
| _curious_ wrote:
| "Otherwise, you're supporting greed and kleptocracy with
| monetary policy." sounds like the MO of the current
| presidential administration...
| ouid wrote:
| When the federal government acts as an insurer of last
| resort against correlated phenomena, but does not have
| any ability to set premiums or regulate behavior,
| companies will seek to maximize their risk in these
| situations. This includes buying back stocks with low
| interest loans. This is not the Fed's job. If these
| companies want to file claims, they will need to talk
| directly to their insurer, the taxpayers.
| pjmorris wrote:
| It's not a black swan, pandemics are predictable.
| @nntaleb, the author of 'The Black Swan' has been
| explaining this.
|
| More crucially, the virus is affecting the real economy,
| and people's lives. Fixes for the financial economy that
| don't address that directly are band-aids to make balance
| sheets look good.
| DSingularity wrote:
| I don't quite agree. When 99.9% of businesses gets
| blindsided by the impact of the shelter in place orders
| it becomes a black swan like event. All those businesses
| couldn't predict an event this cataclysmic to their core
| product.
|
| Just because the pandemic itself was predicted doesn't
| mean much when the global fall out is totally novel and
| unpredictable.
| icedchai wrote:
| Something like this has never happened, even with other
| pandemics. It is an extreme outlier event even if it is
| not technically a "black swan."
| [deleted]
| whatok wrote:
| The Fed buying junk bonds is completely misleading and
| likely only has consequences for a single company; Ford.
| Ford has more liquidity on-hand than GM (investment grade
| which means nothing right now) and can likely ride this out
| better than they can. Which one is more "overextended"? Do
| you have any idea of how large the universe is that this
| covers? Are these non-high yield companies not
| "overextended" somehow because a random rating agency put
| some different letters next to their name?
| kortilla wrote:
| > agency put some different letters next to their name?
|
| It might behoove you to learn what those letters mean
| before you partake in a corporate debt discussion.
| toomuchtodo wrote:
| Ford's finances were marginal prior to COVID ramping up
| across the world (debt downgraded to junk in September
| 2019 [1]). If the Fed's actions are solely to support $F
| from becoming insolvent, that's in violation of their
| mandate.
|
| Your argument holds little water when you wave away the
| ratings of "random rating agencies". Their ratings are
| what drives investment decisioning by the largest funds
| in the world.
|
| [1] https://www.cnn.com/2019/09/10/business/ford-
| downgrade-junk/...
| whatok wrote:
| Ford was only downgraded by a single rating agency in
| September and only recently downgraded by the rest last
| month; well after the initial model of these facilities
| was announced. Ford has been preparing for being
| downgraded and has the liquidity to support themselves
| even without Fed action.
|
| I'm not waving away rating agencies. I'm saying that
| General Motors has less liquidity than Ford. In your "no
| bailouts" world, Ford would be in better shape than
| General Motors. General Motors is investment grade, does
| that magically make them better than Ford even though
| cash on hand says different?
|
| Ratings really mean nothing right now as far as the
| health of a company goes and ratings agencies have
| specifically mentioned that they are backlogged with
| assessing all consequences of what's going on right now.
| Ratings have and are always backwards looking data. How
| the "largest funds" in the world invest is completely
| irrelevant for this.
| toomuchtodo wrote:
| I'm not willing to argue further about a marginal
| automaker's balance sheet and debt ratings. You are free
| to your opinion. Their financial statements and debt
| ratings are publicly available for those interested.
| whatok wrote:
| You're making wildly sweeping statements about "extending
| and pretending" without having any of the underlying
| facts. I'm clarifying those statements with some
| underlying facts. Up to you to incorporate that into your
| worldview.
| chrisco255 wrote:
| This is insane. This is going to lead to nationalization of
| our corporations. This is too massive and you cannot allow
| the government to do this. This is full on fascist.
| Others wrote:
| If a company is failing, the existing management will
| need new jobs anyway. All the government is doing with
| the parents strategy, is ensuring less jobs are lost and
| less lives are impacted. It's not like the government
| really wanted to run GM...
| billylindeman wrote:
| "Otherwise Strong" They've been downgraded for a reason
| (airlines for example)
|
| Most of those fallen angels are leveraged to the max because
| they were borrowing money to finance share repurchasing and
| in some cases even paying dividends.
|
| The moral hazard of this latest move is unconscionable
| whatok wrote:
| There's not a single high yield airliner that qualifies for
| this.
| kortilla wrote:
| Which airline was "borrowing money to finance share
| repurchasing"?
| cs702 wrote:
| They're suddenly rated junk because they have become junk --
| i.e., no longer as creditworthy.
|
| Otherwise I agree: this is _urgently necessary_.
| whatok wrote:
| Right, but there's a massive difference between the broader
| high yield universe that would definitely see some credit
| losses pre-Corona vs recently downgraded companies that
| would likely be okay without this. These facilities were
| created to triage, not resuscitate.
| cryptica wrote:
| Every time the Fed does something outrageous and
| indefensible, you ALWAYS see a bunch of comments and articles
| like this trying to rationalize it. All the facts are clear
| as crystal and speak for themselves:
|
| - Corporations have kept getting bigger and reinforcing their
| monopolies far beyond the point of optimum efficiency and
| have been manipulating elections and policy-making to benefit
| their own interests.
|
| - House prices in big cities have kept going up due to a
| combination of factors including centralization of capital
| due to corporate monopoly power.
|
| - Many corporations took free 0% loans from the government to
| buy back their own shares; often for the purpose of tax
| evasion. This conduct is unethical in at least 3 different
| ways when you consider the fact that the Fed is now
| shamelessly bailing out these corporations to clear that same
| debt which they used for tax evasion.
|
| - Freedom of speech in the work environment has declined
| significantly.
|
| - Trust between people has declined to an all time low due to
| the adverse, coercive work environments in which we operate.
|
| - We are facing huge environmental threats which are not
| addressed due in a large part to lobbyists backed by
| corporate interests.
|
| - The financial system is over-complicated and opaque; few
| people understand how fiat money enters the system but it's
| clear from empirical evidence that it benefits corporations
| while harming both small businesses and consumers. Even the
| Fed itself has admitted that their cash injections do not
| reach small businesses or the workers.
|
| - Our governments will screw over its citizens in the most
| blatant way imaginable; they will even exploit a health
| disaster as an opportunity to fast-track the agendas of their
| corporate masters.
|
| It's bad enough that most people just stand back idly and nod
| their heads... But it's deeply disturbing to witness some
| people go further than that and actually manufacture excuses
| for what are obviously deeply unethical activities...
|
| Also, it seems that these people who spread misinformation
| for the sole benefit of corporations are not even getting
| paid for it! This behavior is not even aligned with the
| capitalistic self-interest ideals which their corporate
| thought leaders keep preaching, it's like some weird type of
| selective masochistic altruism whereby some individuals feel
| compelled to only help evil people who they know will hurt
| them along with the rest of society.
|
| If you're a real capitalist, do as you preach and stop
| defending other richer peoples' interests! That's not how
| it's supposed to work.
|
| If you're not a billionaire yourself and you oppose the idea
| of the government making laws which will reduce the wealth of
| billionaires, you're a socialist for the top 0.0001 percent.
| A maso-socialist.
| thomk wrote:
| "Our governments will screw over its citizens in the most
| blatant way imaginable; they will even exploit a health
| disaster as an opportunity to push the agendas of their
| corporate masters."
|
| .. and to enrich themselves.
| aaronblohowiak wrote:
| The ratio of monetary and fiscal policy is off and it will
| be until we more fully embrace MMT. However, allowing
| massive employment engines to fail is not going to solve
| wealth inequality nor encourage investment in green
| solutions.
| cryptica wrote:
| All empirical evidence from history points to the fact
| that people in civilized countries have essentially
| always been able to rebuild their economies after even
| catastrophic economic failures... Often better than it
| was before.
|
| Look at Germany today; it's an economic powerhouse. You
| wouldn't believe that this is the same country that it
| was after WW2 - Germany did not succeed in spite of the
| post-WW2 economic crisis, it succeeded because of it.
| Also, it's not the first time Germany recovered in this
| way either, just look at post-WW1 economic crisis.
| Germany went from being penniless to become an economic
| and military superpower in a very short time. It had
| accumulated so much surplus wealth that its military
| could almost afford to wipe out the entire planet in WW2.
|
| Financial crashes are an excellent way to clear out
| inefficiencies and allow the markets to reform themselves
| and allow meritocracy to regain significance.
| rayuela wrote:
| They're literally buying JUNK bonds....
|
| https://www.bloomberg.com/news/articles/2020-04-09/fed-
| unlea...
| phkahler wrote:
| If they are buying bonds on the open market then it's not
| helping the companies that issued them, its helping
| investors. If they are buying newly issued bonds then you can
| argue its helping the companies.
| whatok wrote:
| Buying bonds on the open market absolutely helps companies
| that issue them because new issues are priced off secondary
| market. Are you going to buy a new issue bond at 5% yield
| when a similar secondary bond from the same company is at
| 10%?
| base698 wrote:
| Is there a list somewhere with all the purchasing going on
| above the stimulus? It seems from my rather faulty memory we've
| exceeded the $2 trillion stimulus by a lot.
| JumpCrisscross wrote:
| > _We are in uncharted waters_
|
| Yes, we are. But we come with navigational guides.
|
| Quantitative easing was born out of Bernanke's deep study of
| the Great Depression, where exogenous events prompted a
| liquidity crisis that kept causing pain long after its cause
| had subsided.
|
| The demand destruction we're seeing today, as a result of the
| novel coronavirus, is unprecedented in the modern era. We don't
| want to spend decades after the infection has passed rebuilding
| productive capital destroyed for lack of liquidity. That's what
| these measures aim to prevent.
| cs702 wrote:
| Yes, agree 100%. _Urgently necessary._
|
| I imagine there's a lot of 'invisible supply destruction' as
| well, as all those businesses that have let go around 17
| million people over the past three weeks[a] are shutting down
| entire groups and divisions, canceling investment plans,
| walking away from leases, etc. Not pretty.
|
| [a] https://www.wsj.com/articles/u-s-surge-in-unemployment-
| claim...
| ttul wrote:
| Additionally, the Fed is sticking to its mission: support the
| currency within a reasonable inflation band while also
| supporting a target unemployment rate. Debasing the currency
| right now is exactly the right thing to do. Later, the Fed
| will unwind these supports as it did long after the great
| recession ended.
| base698 wrote:
| What happens if liquidity still isn't there? Can't see people
| being comfortable with life as normal at 30% unemployment.
| Seems like leisure industry will be non existent for at least
| the next year and that will have further consequences.
|
| Navigational guides and models only help in charted
| territory.
| oxide wrote:
| If the liquidity isn't there, the Fed will create money out
| of nothing and inject liquidity until it is there.
| JumpCrisscross wrote:
| > _What happens if liquidity still isn 't there?_
|
| Do you mean, what if the economy never recovers?
|
| Then the Fed's actions will soften the blow. They will have
| decoupled the spectre of deflation from the underlying
| destruction. It certainly won't have caused more harm than
| would have otherwise occurred.
|
| That said, no democracy survives 30%+ unemployment for
| long.
| BurningFrog wrote:
| > _The sellers will come out whole, the buyer -- i.e., the US
| government -- will suffer the losses._
|
| Isn't the Fed buying with money it prints?
|
| If so, it's not the US government that will suffer the losses.
| aaronblohowiak wrote:
| This misunderstanding gets a lot of people upset. Printing
| money creates inflationary pressure, yes, but there are a lot
| of _deflationary_ pressures right now, so if they get it
| right, things will balance. It also creates moral hazard,
| though (despite what many people believe) the fed is only
| buying bonds that were investment grade until just before the
| fed starting intervening in the system -- it will also be
| buying junk bonds etfs (probably hyg and jnk), but these are
| better described as high-yield corporate bonds. This more
| serves to protect the liquidity of ongoing concerns ability
| to raise debt (necessary for the economic machine to keep
| running) than it does to put money in the pocket of greedy
| people (it will -- at best -- maintain the value of those
| bonds, and more likely soften the blow.)
|
| Disclaimer: recently sold my JNK holdings after fed's
| announcement today.
|
| Prediction: we will end up with full Japanification and/or
| MMT.
| mrfusion wrote:
| They can always unwind their purchases later. It doesn't have
| to be a permanent market disruption.
| tehlike wrote:
| isn't it almost always permanent though?
| jonas21 wrote:
| No. For example, TARP was completely unwound after about 6
| years (and ended up making a small profit too).
|
| > _On December 19, 2014, the U.S. Treasury sold its
| remaining holdings of Ally Financial, essentially ending
| the program. TARP recovered funds totalling $441.7 billion
| from $426.4 billion invested, earning a $15.3 billion
| profit_
|
| [1]
| https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
| snarf21 wrote:
| Agreed, but that is their job. The Fed frequently plays the
| role of buyer/lender of last resort. They are trying to prevent
| a collapse and will worry about unwinding later.
| jotto wrote:
| "order of magnitude"?
|
| * March 4th assets: 4.2T
|
| * Today: 5.8T
|
| * Proposed: 2.3T more
|
| so that's 3.9T since March 4th. Doubling. Not "order of
| magnitude"
| base698 wrote:
| Maybe he was talking rate? 2T seems off the charts if you're
| talking the normal events, looks like 2008 made it jump 1T to
| 2T in 2 months. This jumping 2T in 1 week is a little off the
| charts.
| gumby wrote:
| This is a site for computer nerds, and to them doubling _is_
| an order of magnitude.
|
| (Well at least to the subset who think in binary. For those
| who prefer hex, even a factor of 10 won't do it).
| r00fus wrote:
| Order of magnitude = 10. Binary order of magnitude =
| twofold = 2x.
|
| Mixing terminology as it suits oneself is considered
| deceitful and/or manipulative. Making excuses for someone
| who does this and doesn't restate/recant is also bad form.
| gumby wrote:
| https://en.wikipedia.org/wiki/Order_of_magnitude
|
| Although if jocularity in your message whooshed over my
| head I apologise for that.
| vkou wrote:
| > And all of this is urgently necessary to prevent economic
| collapse in the US. Urgently necessary.
|
| The fed buying crap bonds isn't even doing anything to prevent
| economic collapse. The economy has already collapsed, due to to
| the shutdowns. This is nothing but a transfer of wealth from
| people who own US dollars, to people who own US equities.
|
| All it does, is prop up the stock market. The real economy
| could go to zero, but as long as the Fed is buying assets, the
| stock market will keep looking green.
| deanmoriarty wrote:
| Can you or someone else tell me what exactly that means for me?
|
| I have my savings in a 401k with a mix of index funds stocks
| and bonds and to be honest I am quite happy that the government
| is stepping in and not letting everything go down.
|
| I'm sure there is a downside, but can you make it clear what
| that is?
|
| I noticed a lot of HN folks just love to be alarmist when it
| comes to the economy. I am sure this time you are right, but
| I've been reading HN comments like yours every single week for
| almost a decade now, always suggesting that we are on the verge
| of an impending doom...
| adventured wrote:
| What the Fed is doing will work very well, at some modest
| real cost later on (likely to the dollar, represented in the
| cost of things we import and commodities), if we are able to
| somewhat restart the economy in the coming months (and we
| will). The worst of the NY region's situation (which is
| overwhelmingly the primary problem in the US) will end in the
| coming weeks (it's ending now, represented in the plunge in
| hospital and ICU admissions; the deaths will lag though). The
| Spring and Summer heat will dramatically reduce the virus
| transmission, combined with practical ongoing measures like
| heightened rapid testing, distancing and quarantining (along
| with occasional lockdowns that will spring up due to burst
| outbreaks; we will likely get far more aggressive with
| tracking people regarding outbreaks). There's a decent chance
| we'll combat the virus short term with a serum therapy (might
| be able to considerably reduce the per case mortality rate
| over the coming year), and then a vaccine is definite later
| on.
|
| The tangible cost to what the Fed is doing, is that they will
| effectively destroy low single digit trillions of dollars in
| wealth held in US dollars (picture household wealth at $100
| trillion for this purpose, and then picture the Fed lighting
| $1-3 trillion of that on fire as a means to prop up the
| economy; they're debasing our national wealth in this
| process, drawing on it via their control of the dollar, to
| point it as a firehose at the fire; not exact figures, merely
| a conceptual representation). That damage is likely to be
| anywhere from one to a few trillion dollars in real losses
| that they'll see from their programs (only a portion of what
| they do will result in losses of real value, as in the
| actions taken by the Fed during the great recession; % losses
| will be higher in this case, as they're doing some wider,
| riskier things). They're trading that hit as a cost to prop
| the whole thing up until the economy can find its legs again.
|
| It's absolutely the right approach. It's the only serious
| option, other than doing nothing (which isn't reasonable, but
| it's another option). It will not be without a cost. It will
| prevent a far, far worse catastrophic outcome. If
| unemployment peaks at ~14-18% (it's almost guaranteed to hit
| at least the 15% area somewhere, and soon), without the Fed's
| actions you could easily double that figure.
|
| The US is incredibly fortunate in this case. The many choices
| of our ancestors, which made the USD the global reserve
| currency post WW2, we're cashing in that rainy day benefit
| right now. We've been irresponsible with our fiscal condition
| the past 20 years, so our primary fiscal back-stop is the US
| dollar on such a short notice desperate need (this is far
| beyond the great recession, in terms of extreme sudden need
| of dollars); using that is a form of a tax against the assets
| held in dollars and the productive output of the US economy.
|
| There is a very plausible scenario where the US dollar sees
| little negative impact despite the trillions of dollars in
| magic printing the Fed is going to do. And that is: the other
| major currencies it is competing with globally, are all
| supported by economies being similarly smashed right now
| (Eurozone, China, Japan; and the Chinese Yuan has very little
| global footprint, so it's not very relevant to that context
| presently, it's really mostly the Euro). The global demand
| for US dollars right now is extreme, which pushed the dollar
| to a very high level recently. That dollar demand, for
| liquidity purposes, will relax later on as some normalcy
| returns with eg a vaccine (within ~12-18 months sometime
| probably), and then the dollar will see some fallout from
| what the Fed is doing now, that's when the long-term cost
| will begin to be represented in such things as consumer
| prices, commodity prices (priced in dollars), and so on.
|
| People with assets will benefit tremendously from what the
| Fed is doing. The stock market would be anywhere from 1/3 to
| 1/2 lower than it is right now, if the Fed hadn't stepped in
| in an extreme way (and I don't like where the market is at
| right now at all, it's not properly pricing in the grinding
| damage we have to deal with over the coming year, it's
| temporarily buoyant on the Fed's sugar actions). This is the
| world's largest bailout for asset holders, and it also
| happens to be very necessary to preserve the economy until it
| can return to functioning properly.
|
| The only approach that would have maybe been better, is if a
| national hold had been placed on all major firings, all
| mortgages and rents for N months (3 months initially). The
| Fed would then step in to pay that toll directly (ie prevent
| the fire, rather than try to put it out afterward), along
| with the Treasury doing various programs. That could have
| possibly prevented more damage than what we're doing now. The
| US system, legally speaking, doesn't allow for that kind of
| command-economy type action very easily though. So the Fed's
| moves, which were 'guns at-ready' and made possible by the
| great recession, were the best choice we had (if this were
| 2007 and it were happening then, the Fed wouldn't have been
| able to move as quickly; there was a lot of stumbling around
| in dark in the initialy days of the great recession, trying
| to figure out what the Fed was allowed to do and what made
| sense).
|
| Long story short, the Fed is eating some of our national
| wealth to do what it's doing, that's the tax we're paying
| (and some of that is being paid by the rest of the world, as
| the dollar is the reserve currency and widely held). Instead
| of everyone selling off 1-3% of their wealth and handing that
| cash to a central authority to take bold actions, the Fed is
| doing a conceptually similar thing via 'stealth taxation'
| (aka inflation (which won't register near-term due to very
| slack demand), aka dollar debasement, aka printing).
| aaronblohowiak wrote:
| This should be the top comment.
|
| I think you are a little too aggressive about inflation in
| terms of consumer prices and underselling the impact to
| wealth inequality. Hopefully we will be able to have
| interest rates rise.
| legolas2412 wrote:
| When federal reserve hold interest rates at 0 for 7 years,
| and pump 4 trillion in the economy via quantative easing to
| purchase mortgages, it is fair to say that federal reserve is
| pumping up assets.
|
| The impending doom has been pushed in the future, but it will
| come back much stronger. Sometimes in the future, whrn
| reckoning comes, usd will lose its reserve currency status,
| there will be massive currency
| devaluation/hyperinflation/stagflation.
| cobookman wrote:
| And what the Euro will be used? Same issue. How about RNB?
| Welp its even more manipulated.
|
| Nobody knows what the future will hold when everyone is in
| the same position.
| aaronblohowiak wrote:
| "Pumping up assets" is aka income inequality, since people
| who own assets derive part of their income from the
| increasing value of the asset over time. This also makes it
| harder to go from a worker to an owner.
|
| Yes, pension funds and 401ks own a lot of these assets --
| but people who have pensions and 401ks are doing better
| than many many other people in the country.
| OscarCunningham wrote:
| Isn't the Fed buying at market prices? What makes you think
| they are overpaying?
| ghouse wrote:
| Buying at at all increases demand, therefore increases price.
| Buying at 2.3 T scale increases demand a lot.
| OscarCunningham wrote:
| Sellers will still be competing to sell to the Fed, and if
| the Fed openly announces that it's buying then the market
| knows that the surge of demand isn't introducing any new
| information about fundamentals.
|
| EDIT: This doesn't mean the price won't rise. The _purpose_
| is to cause price rises, i.e. inflation. But they won 't be
| _overvalued_ ; the true dollar value will have increased.
| ghouse wrote:
| The fed is shifting risk from the free market (which the
| price is set to balance supply and demand) to the tax
| payer.
|
| > the true dollar value will have increased. The very
| definition of inflation is to reduce the value of money.
| Can you help me understand how they're trying to cause
| inflation, but also increase the "true dollar value"
| OscarCunningham wrote:
| I mean the Fed's actions will increase the nominal value
| of bonds, but this increase will be due to inflation
| rather than because they're paying more than the rational
| valuation.
| aaronblohowiak wrote:
| Why do you think the tax payer is on the hook? Where do
| you think the Fed's money comes from?
|
| The fed's balance sheet impacts people who hold dollars,
| not people who pay taxes.
| SilasX wrote:
| Yeah, but it's evenly distributed across the whole bond
| market, and in purchases along with market buyers. How does
| that translate into (any reasonable operationalization of)
| "wildly overpaying"? I get overpaying, but I'd need to see
| how it becomes "wildly overpaying".
|
| FWIW, I don't like what the Fed is doing, and _am_ troubled
| buy it, but I think OP is overstating it.
| samfisher83 wrote:
| They did the same thing in 09 and made money.
| intuitionist wrote:
| Whoever came up with the name "junk bonds" for high-yield
| corporate debt was a master of propaganda. The truth is, the
| bonds the Fed is buying are more like what Ben Graham would
| call "senior securities with speculative features" (although
| classically that referred to preferred stock) and really aren't
| that different from the BBB-rated bonds they were buying last
| week. (Indeed, they're buying bonds that were investment-grade
| until a couple weeks ago.) These aren't contingent claims on a
| company's assets, like Alphabet stock or a S&P 500 index fund,
| they're senior claims, which are structurally and legally less
| risky than equities, if not actually less risky than every
| equity security.
|
| Personally, it seems to me that if you're not willing to let
| capitalism work itself out in a crisis, you should stop
| pretending to have a capitalist system at all; Norway is a
| pretty entrepreneurial country despite being a certain shade of
| pink. But the arbitrary dividing line between "investment
| grade" bonds and "junk" bonds is not some Platonic boundary
| between "safe securities" and "crap." It's there for
| complicated historical reasons which are perfectly reasonable
| to ignore during a crisis caused by an unforeseen and
| unprecedented economic slowdown.
| baq wrote:
| how much money disappeared from the stock market in the past
| few weeks? i wonder if the numbers that we're talking about
| match up. there might be little actual printing involved, just
| using that idle money parked at bank accounts instead of
| stocks.
| nickff wrote:
| My read is that velocity of money has decreased (leading to
| decreases in nominal prices), and they are printing money to
| increase M2 (sometimes described as the money supply). This
| will reduce/prevent immediate deflation, but could lead to
| inflation when the velocity increases again.
|
| https://www.investopedia.com/terms/m/m2.asp
| nakedshorts wrote:
| The Fed's balance sheet is now at $6T, which is too large for
| them to unwind. This only ends in one of two ways:
|
| 1. A massive asset bubble and a fundamental re-evaluation of
| risk/reward ratios for all investments. Historically, the average
| P/E ratio for S&P 500 companies is around 16. Roughly speaking,
| this means that investors are comfortable making their investment
| back in 16 years in static market conditions. Does this decision
| calculus change if you know that the Fed will bail you out as
| soon as times get tough? You bet it does. Similarly, corporations
| are much more incentivized to take on as much debt as possible in
| hopes of inflating their stock prices. When times are good,
| massive bonuses for execs all around. When times are bad...hey,
| bailout! I expect the "new normal" for P/E ratios to be in the
| 30-50 range. In the short term (next decade or so), this means
| the party continues, and we see massive growth in the stock
| market. But when the bubble pops, it'll pop harder than ever...
|
| 2. The second scenario is that debt-holders worldwide lose faith
| in the dollar and start dumping Treasuries, leading to
| hyperinflation. This doesn't seem to be happening as of today, in
| fact, the more money the Fed prints, the stronger the dollar.
| Central banks worldwide are printing money as well, so the dollar
| looks like the "least ugly" choice by comparison. The big unknown
| is how long the Fed can keep printing before debt-holders start
| second guessing the dollar's value.
| icu wrote:
| imho we are going to see something like both scenarios...
| scenario 1, then scenario 2.
|
| Also, when you say "in fact, the more money the Fed prints, the
| stronger the dollar", I don't think this is quite the case. The
| supply of US dollars isn't enough to match the global demand
| for US dollars. The Fed is having to "print" (basically enter
| some numbers into a computer) dollars to meet this demand
| otherwise it causes havoc... perfect example is the repo market
| spiking and the Fed having to intervene.
|
| For a good explanation search for the 'dollar milkshake theory'
| by Brent Johnson.
|
| I agree that the Fed's interventions can't keep on going...
| each intervention creates market distortions that end up
| requiring more interventions. However, one of my economics
| professors used to say, "In economics things take longer than
| you expect, and go quicker than you expect". So, I take that to
| mean that the Fed will 'save the day', continue to distort the
| market, and we will have a catastrophic unwinding of the debt.
|
| In terms of how I'm going to protect myself, I looked long and
| hard at Ray Dalio's 'All Weather Portfolio,' but I've decided
| to implement Chris Cole's 'Dragon Portfolio' (search for 'The
| Allegory of the Hawk and the Serpent') with a tactical overlay
| taken from Seth Klarman's out-of-print investing book, 'Margin
| of Safety' which I highly recommend.
| aazaa wrote:
| How about:
|
| 3. Dollar devaluation through expansion of the balance sheet
| even further.
|
| The BoJ balance sheet is about 100% of GDP. The Fed balance
| sheet is about 30% of GDP. That gives _a lot_ of room to add
| assets before the US looks anything like Japan in that
| department.
|
| This balance sheet expansion could happen against a backdrop of
| stock prices that would otherwise be falling. Expanding the
| balance sheet through stock purchases allows the Fed to correct
| the global dollar short squeeze while preventing calamitous
| stock repricing at the same time.
|
| Nominally, things wouldn't look much different to those in the
| US. But in real terms, the result would be crushing. It seems,
| however, that politicians and many voters only consider nominal
| returns, not real returns.
|
| This is one of the reasons I find it hard to believe people who
| claim the Fed is "out of ammunition." We're at the level of
| bazookas now, but the Fed has everything from that to nuclear
| ICBMs and more to play with courtesy of the dollar's reserve
| currency status.
|
| https://www.lynalden.com/global-dollar-short-squeeze/
| athrowaway3z wrote:
| I agree with you except for the last statement.
|
| If corona turns out worse then anticipated for the US and
| Trump insist on ending his term on a high stock market in 8
| months time, the damage could have already been done.
|
| If the Fed got it up to 100% of GDP (or whatever is
| considered extreme after this crisis) the status of 'reserve
| currency' will be in jeopardy.
|
| Being the 'reserve currency' is all there is to the dollar,
| and the US has successfully leveraged it for more than 50
| years.
|
| However, if it comes into question, the collapse of the US
| will be almost instantaneous.
|
| The ICBM's are for show, no sane person would ever fire them.
| rayuela wrote:
| 100% spot on analysis. This is bailing out the rich strategy
| again. Gotta be ready to ride this wave up if you can, but oh
| man is this gonna hurt when it pops.
| howeyc wrote:
| Scenario 2 is your number 1, just one step further in the past.
| Dumping treasuries leads to you having dollars, you've
| basically switched from interest-bearing (admittedly super low
| interest rate right now) to non-interest bearing (cash). You
| still need to put the money somewhere, hence asset bubble.
|
| Also, why does the government debt "bubble" ever have to "pop"?
| Does everyone still believe the government has to "pay off the
| debt"?
|
| They don't. Ever. For a large number of reasons, to name just a
| couple:
|
| - No more treasuries or bonds (how many people would freak out
| if those no longer exist)
|
| - They can print more money forever. Besides, at this point
| it's just numbers in the FED computer system. Hardly any of it
| even exists as a physical object (paper, coins).
|
| Also, I'll let you in on little secret. The Fed is never going
| to fully unwind its balance sheet.
| xiaolingxiao wrote:
| Asking as a relative novice, if the Fed does not "unwind its
| balance sheet," does this mean overtime the Fed will come to
| own more and more "things"?
| icu wrote:
| Yes, just like the Bank of Japan.
| tryptophan wrote:
| >Dumping treasuries leads to you having dollars, you've
| basically switched from interest-bearing (admittedly super
| low interest rate right now) to non-interest bearing (cash).
| You still need to put the money somewhere, hence asset
| bubble.
|
| The balance sheet can be unwound simply by waiting for the
| bonds to expire, then the money goes poof out of existence
| the same way it poofed into existence.
|
| What the fed has been doing though, is rolling the money into
| new bonds, keeping the total balance ~constant. If they
| didn't, it would leave a $4T hole in the bond market that
| would suddenly need to be filled.
| rsp1984 wrote:
| _The balance sheet can be unwound simply by waiting for the
| bonds to expire, then the money goes poof out of existence
| the same way it poofed into existence._
|
| How would that work? The money's been created and has been
| put into the economy. Balances on bank accounts have
| increased. You can't just take it back just like that.
| tryptophan wrote:
| Because the bond belongs to the fed.
|
| When it matures, the fed holds everything. There isn't
| anything to "take back"; they have it all already.
| rsp1984 wrote:
| When the bond matures it's either paid back or rolled
| over to a new bond or the debtor defaults. There is no
| fourth option.
| eldavido wrote:
| I think this is what it looks like when the government becomes
| more activist in the overall running of the economy.
|
| The pendulum swings. We had a lot of government involvement in
| the 40/50s. It declined through the 60s and 70s until we got
| peak deregulation in the 80s. People forget that near-free
| telephone calls and cheap flights everywhere were a direct
| result of all the deregulation. Now I see things swinging back.
| Maybe it's generational, we forget/become blind to how good we
| have it, and only see the disadvantages, and then swing back
| the other direction.
|
| My sense is that we're heading toward something more like China
| with all the good and bad that entails. Much closer
| cooperation/coordination between the federal government,
| industry, finance, and academia. Government that doesn't let
| big business fail, more stable and "guaranteed"
| employment/income for people, more state direction of the
| economy. More emphasis on big firms, "national champions"
| (Trump creating the CEO advisory council with Apple/Tesla/etc.
| CEOs, bailing out Boeing), America-first (China-first!)
| industrial policy, and limited scope for foreign
| ownership/takeovers (US blocking ZTE's takeover of Qualcomm,
| arresting Huawei execs in Canada). With the accompanying
| reduction in freedom of expression, individual rights, ease of
| hiring and firing, economic freedom, and overall
| dynamism/ability to adapt and invent new things.
|
| It's been heading this way for a while and frankly, seems to be
| what people want. Massive escalating bailouts every 10 years,
| and a serious push for a socialist, worker-first government. It
| seems there's been some kind of deep shift in our culture away
| from risk-taking and more toward the stable
| academic/government/state-directed way of life.
|
| Look at all the main street businesses around you, especially
| hotels, dry cleaners, diners, gas stations, auto repair shops.
| It's striking how many were started from about 1940-1970 or so.
| Nobody wants to own or operate this stuff anymore. Everyone
| would rather go to college, get a stable job at a big, high-
| paying, high-productivity company, usually that offers good
| insurance, paid parental leave, etc. and work there for a long
| time, or hop between various versions of this same arrangement
| for a few years at a time.
| eganist wrote:
| > $6T, which is too large for them to unwind.
|
| Can I ask for a journal or study source/citation for this?
| justinzollars wrote:
| History books? You could read about the Weimar Republic.
| OscarCunningham wrote:
| Would that tell me why US inflation fell to -1% when the
| Fed massively expanded its balance sheet in 2008?
| jdipasq wrote:
| The velocity of money, not solely the supply of money,
| determines inflation.
| justinzollars wrote:
| No inflation. Amazing.
|
| We must be living in a different place.
|
| Childcare, Healthcare, Education and Housing have
| experienced huge inflation.
|
| A home in the bay area was 700,000 in 2008. Today you
| can't find anything for less than 1.2 million.
|
| When this inflation hits the economy what will a home
| cost? What will education cost?
| OscarCunningham wrote:
| You're saying the official figures are wrong in such a
| way to understate inflation after, but not before, 2008?
| What change in 2008 caused that?
|
| Isn't it more likely that the price rises in Bay area
| property have been compensated for in other areas and
| sectors?
| imtringued wrote:
| The Weimar Republic had debt obligations that it couldn't
| repay and so they printed money. Meanwhile the balance
| sheet of the Fed is just that. A balance sheet. The only
| way they can create inflation is by making the balance
| sheet bigger. As long as inflation is below the target they
| can just keep increasing the balance sheet. There is no
| obligation to decrease the balance sheet unless inflation
| is above the target.
|
| Why are they even doing this in the first place? The Fed
| buys assets during deflation and sells assets during
| inflation. Buying a cheap asset (e.g. $50 for a share) with
| money created from thin air increases the money supply and
| over the long run increases inflation. Inflation causes the
| prices of cheap assets to rise above the original value to
| $100 for a share. The situation is out of control! What can
| the fed do? It can sell assets in exchange for $100. In
| other words. The fed never runs into a situation which it
| cannot undo.
| rsp1984 wrote:
| _It can sell assets in exchange for $100._
|
| To whom?
| nakedshorts wrote:
| See the charts for yourself:
| https://fred.stlouisfed.org/series/WALCL
|
| In the aftermath of the 2008 financial crisis, the Fed
| managed to unload a mere $800B (balance sheet went from $4.5T
| to $3.7T) in the _longest bull run in history_. Now that it
| 's an order of magnitude bigger, you can draw the logical
| conclusion yourself.
| jdipasq wrote:
| Actually, I can't draw the logical conclusion myself. What
| is it?
| omgwtfbyobbq wrote:
| It'll take a while to unwind, no doubt about that.
|
| The Fed currently holds ~$5.8 trillion, but it's long term
| holdings are about ~$1 trillion in current dollars, so it's
| holding an addition ~$4.8 trillion above what it normally
| has since the early 2000s.
|
| In October of 2014, it held ~$3.7 trillion, or ~$2.7
| trillion above what it normally holds, so the recent
| increase to $4.8 trillion above baseline isn't quite an
| order of (base 2) magnitude increase.
|
| Having said all that, the net worth of households and non-
| profits in the US is about ~$118 trillion.
|
| https://fred.stlouisfed.org/series/TNWBSHNO
| rayuela wrote:
| Love it when people cite FRED. Top quality data source and
| one of the best litmus tests for the credibility of
| someone's claims on economic matters. This guy knows what
| he's talking bout. Good job!
| steveeq1 wrote:
| Isn't it obvious this will lead to hyperinflation? I am BAFFLED
| why this isn't being reported on cnn or whatever. All I see is
| corona virus. The sad thing is is that there will probably be
| more lives lost to hyperinflation than covid-19.
| OscarCunningham wrote:
| Similar lending happened in 2008 and inflation fell to -1% in
| 2009.
| AngrySkillzz wrote:
| No, it is not at all obvious. Read up on the papers written
| about QE after the 2008 crisis. Monetary base increases
| significantly but the money multiplier falls in tandem. The net
| effect is that the price level is not strongly impacted by this
| type of program, outside of pre-empting deflation by providing
| liquidity to counter a potential fall in economic activity due
| to seizing credit markets.
|
| See also "banks don't lend out reserves." The linkage from
| "cash" (i.e. bank reserves) to the market price level of goods
| is not very strong.
| jdhn wrote:
| >Isn't it obvious this will lead to hyperinflation?
|
| I thought that QE was going to lead to a lot of inflation, and
| it hasn't seemed to. If inflation has shown up anywhere, it's
| been in the stock market and housing prices due to low interest
| rates. Even then, I'm hesitant to say that it's primarily
| responsible for the rise in housing prices because I think
| demand from my generation (millenials) is helping to cause the
| sharp spike in markets such as NYC LA, Atlanta, etc.
| dragonwriter wrote:
| > I thought that QE was going to lead to a lot of inflation,
| and it hasn't seemed to.
|
| A major point of QE was to lead to significant inflation
| _compared to not adopting the policy_ ; without it, the
| projections were that significant deflation would occur.
|
| So, it netted to very low but positive inflation, as
| intended.
|
| > Even then, I'm hesitant to say that it's primarily
| responsible for the rise in housing prices because I think
| demand from my generation (millenials) is helping to cause
| the sharp spike in markets such as NYC LA, Atlanta, etc.
|
| There's no spike, just a smooth continuation of a trend that
| has existed during most economic expansions (and even some
| recessions) since at least when Gen X were children.
|
| See, e.g., https://fred.stlouisfed.org/series/NYSTHPI
| icu wrote:
| Inflation happens when you increase money supply and have
| velocity of money. With the global lockdown, you're not taking
| into account the demand and supply curve will shift down to a
| new lower price equilibrium.
|
| In other words, in the short term I think there will either be
| deflation, or no change to inflation (due to all the money
| printing).
|
| The question will be what will happen once the global lockdown
| is lifted, and how quickly the velocity of money picks up.
| There might very well be high inflation or hyperinflation in
| certain things, but not in others (due to how quickly global
| supply chains are repaired and how substitutable certain
| products are. In 2008 the money was given to the banks (to
| recapitalise them) and then transmitted to financial assets due
| to the search for yield. This meant that the velocity of the
| new money was very low, which is why there wasn't high levels
| of inflation. If there is MMT or helicopter money, we could
| very well see high levels of velocity and inflation.
| batterseapower wrote:
| Market inflation expectations are below where they were at the
| start of the crisis: https://fred.stlouisfed.org/series/T10YIE
| dragonwriter wrote:
| > Isn't it obvious this will lead to hyperinflation?
|
| No, because this kind of thing has been done before without
| hyperinflation.
|
| What you are ignoring is what the expected inflation/deflation
| course would be without the policy.
| ghouse wrote:
| So, the GOP is pro-free market, except when they're not? RIP
| capitalism?
| tathougies wrote:
| The GOP does not run the Fed, and for the most part,
| Republicans are much more likely to be opposed to the Federal
| Reserve system: https://www.pewresearch.org/fact-
| tank/2015/12/16/americans-v...
| [deleted]
| OscarCunningham wrote:
| The Fed's mandate is to keep the value of money steady.
| Suddenly deviating from that mandate wouldn't be 'free market';
| it would just be stupid. The Fed's actions here are exactly
| what they promised.
|
| In fact, if we did have a system with a private money supply
| then those issuers would also be printing money right now.
| ghouse wrote:
| I consider increasing the Fed's balance sheet by 10x to
| working exactly against the mandate of keeping the value of
| money steady. How else might that action be interpreted?
|
| However, in contrast to your explanation, I understand the
| Fed's mandate to be "promote effectively the goals of maximum
| employment, stable prices, and moderate long term interest
| rates"
| OscarCunningham wrote:
| > I consider increasing the Fed's balance sheet by 10x to
| working exactly against the mandate of keeping the value of
| money steady. How else might that action be interpreted?
|
| If they don't do it, there will be a lot of deflation. With
| it there won't be as much. So the money printing is making
| prices more stable. (There will probably still be some
| deflation unless they go further, which they should.)
| acd wrote:
| We could give money to people/government directly. Why create
| money as private debt?
| thomashobohm wrote:
| Yes, giving money to people/governments directly is a good
| idea, but it's not something the Fed can actually do. The
| government has to step in for that sort of policy. This isn't
| "creating money as private debt"-it's purchasing debt.
| Eventually, these bonds will pay out, and that will take most
| of the money just injected into the money supply back out of
| it. The only new loans it's issuing are to states and
| municipalities.
| pjmorris wrote:
| > Eventually, these bonds will pay out, and that will take
| most of the money just injected into the money supply back
| out of it.
|
| That's the theory, first given when the Fed expanded from
| buying treasuries in to buying bonds back in 2008. Looking at
| their balance sheet [0], it isn't working that way in
| practice.
|
| [0] https://fred.stlouisfed.org/series/WALCL
| OscarCunningham wrote:
| Why does the absolute size of the balance sheet matter if
| inflation is steady?
| pjmorris wrote:
| If wages followed asset prices, it likely wouldn't
| matter. If everyone was making 4-6 times what they were a
| decade ago, the playing field would be level.
| OscarCunningham wrote:
| What playing field? Everyone's using the same dollars.
| pjmorris wrote:
| The playing field is buying power, measured in dollars.
|
| The dollars earned from a person(entity) selling a bond
| to the Fed at a price that only the Fed would buy are new
| to the money supply. The dollars earned from a person
| selling hours of labor in to the labor market are subject
| to other market forces and are harder to come by, as
| evidenced by the fact that most people don't have 4-6
| times the wages or savings that they did back when the
| Fed's balance sheet was ~800 Billion in US Treasuries,
| 12-13 years ago.
|
| Inflation isn't steady, it's lumpy, which makes the
| playing field lumpy.
| claudeganon wrote:
| It's amazing to me, seeing the flagrant corruption and abuse
| of these norms and laws over the past few years, that people
| still cling to ideas like what the Fed can and cannot do.
| These prohibitions exist only to the extent that they don't
| impinge on the power of Capital owners and their institutions
| and disappear the moment they need bailouts.
| chaorace wrote:
| It's funny, I agree with your points, but I'm concerned for
| a very different reason!
|
| The Fed is an institution staffed by unelected, career
| technocrats. It's not supposed to have such sweeping powers
| (and, by charter, it really doesn't), but, like most parts
| of the executive branch, it has expanded in scope over time
| due to a steady erosion of our lawmaking institutions.
|
| Put bluntly, the Fed can do what it does for the same
| reason the President can start pseudo-wars without going to
| congress: it's inconvenient for lawmakers to cop to such
| responsibilities. The other branches of government are
| simply shoring up the holes.
|
| To be honest, I like the Fed a lot... In so far as grossly
| unchecked power goes, we could have far less competent
| people at the helm (The fact that so few in monetary policy
| wind up in congress is the real tragedy, if you ask me).
| That being said, future performance is no guarantee.
| History shows that it is not so simple to take back power
| once ceded for the sake of expediency when it is no longer
| convenient.
| eldavido wrote:
| Nailed it.
|
| The question is how you put the genie back in the bottle.
|
| I think this is the core insight of small-government
| conservatism. When big, powerful institutions exist, they
| can do great things...provided they're always run by
| exceptional people. But when they're not, the damage they
| can do is incalculable.
|
| So the question becomes, how do you create a system with
| the best long-run survival properties? I, I suspect much
| like you, would like it if there was some way we could
| return a bit of power back to Congress and other
| institutions, and away from the huge executive we have
| today, in 2020. It just feels like a ticking time bomb
| until the wrong people get the helm.
| jameslevy wrote:
| A ticking time bomb until the wrong people are at the
| helm of the executive branch? I'm not hearing ticking so
| much as a loud ringing in my ears.
| throwlaplace wrote:
| you're downvoted (i upvoted) but what you're saying is
| completely true. everyone that downvotes is one of those
| "well akcshually..." people. it's plain as day that it's
| true even if it's not _formally_ true. the formal rules of
| governance and policy are _manipulated_ to make it so. it
| doesn 't not mean that it isn't so. the old adage that
| there have always been things that were legal but
| immoral/unethical applies. longer you bury your head in the
| sand (people that dissent without any substantive response)
| the longer we will be mired.
|
| here's an example: do you all realize that the banks
| providing these loans are being paid essentially commission
| [1] for making the loans? anywhere from 1% to 5%? 5% on
| 500B is 25B in the pockets of bankers. why?
|
| [1] bottom of the page here under PPP incentives
| https://www.chapman.com/insights-publications-
| SBA_Paycheck_P... . and if you think covering "processing
| fees" isn't commission then ask yourself as a programmer
| why it's not a flat incentive? does it cost more to process
| the paper work for 100k loan than a 10k loan?
|
| edit: what in the fuck am i getting downvoted for? i have a
| literal citation of a tax attorney. i'm not editorializing
| or taking anything out of context or whatever. it's right
| there:
|
| >the SBA will reimburse lenders for PPP loan processing
| fees, based on the disbursed loan amount: 5% for PPP loans
| up to $350,000; 3% for PPP loans greater than $350,000 and
| less than $2 million; and 1% for PPP loans of $2 million or
| more
|
| what could you possibly disagree with here??? jesus christ
| forgive me if your naive understanding of the world doesn't
| reflect reality.
| Karunamon wrote:
| > _it 's plain as day that it's true even if it's not
| formally true_
|
| What does this mean? It's either verifiably true or it is
| not.
| throwqwerty wrote:
| i don't understand this response. are you truly unaware
| that the truths of many policies are "verifiable" but not
| practically verifiable until many many years after they
| are implemented. again - this is the whole point of the
| study of history.
| Karunamon wrote:
| Could you give an example?
| thomashobohm wrote:
| Please show me a single time in history when the Fed has
| implemented a fiscal stimulus. I'll wait.
|
| I, personally, believe we need a stimulus for working
| families, and that we should significantly increase taxes
| on capital owners, etc. If you believe in that too, then
| you should be directing your energy towards getting the
| government to pass a stimulus, not towards trying to get
| the Fed to do it (they can't).
|
| BTW, even in a socialist utopia, presuming that there are
| still markets and currency, we will probably still need an
| independent central bank.
| throwlaplace wrote:
| >Please show me a single time in history when the Fed has
| implemented a fiscal stimulus. I'll wait.
|
| please show me a single time in history that the Fed has
| leant directly to businesses, states, and local
| governments; from the article
|
| >and reached into unchartered territory to support
| American businesses, states and local governments.
|
| so hmmmmmmmmmmmmmmm
| pjmorris wrote:
| My theory for Fed fiscal stimulus: In 2008, the Fed
| started buying things that weren't treasuries (e.g.
| Mortgage Backed Securities (MBS)), and bulking its
| balance sheet up from ~800 Billion to ~4 Trillion. Some
| portion of that ~3 Trillion went to buying securities for
| which there was no other market at the going price. The
| difference between the market price (what a non-Fed buyer
| would pay) and what the Fed paid was stimulus to the
| firms selling the securities. They could turn around and
| spend that difference in to the economy.
| whatok wrote:
| The Fed (rightfully) does not have the authority to do that.
| JumpCrisscross wrote:
| > _We could give money to people /government directly_
|
| The Fed doesn't have the legal authority to give individuals
| money. That's why the Congress is passing stimulus bills.
|
| Moreover, buying assets is different from handing out money.
| When Congress gives every American $1,200 money, the money is
| spent. There is no balancing entry on the government's balance
| sheet. When the Fed lends a dollar or buys securities, it
| spends cash and gains assets.
|
| The Fed _could_ lose money on those assets. But that risk
| profile is night and day to the federal government 's. (This
| difference also makes a dollar of fiscal stimulus more powerful
| than one of monetary spending.)
|
| There are other differences between fiscal and monetary policy,
| a topic with lots of literature behind it. Congress controls
| fiscal policy. It has outsourced monetary policy to an
| independent Fed.
| throwaway_USD wrote:
| Government indebted every US taxpayer $18,000+ on the promise
| of a $1,200 check per person...the remainder is given to the
| FED to "lend" back to taxpayers and businesses.
|
| In other words, imagine I took $18,000 from you, paid you
| $1,200 directly from the $18,000, then I loaned you the balance
| and charged you interest on the the very money I took from you
| and loaned back to you.
|
| What should have happened is exactly as you say, give the
| people $18,000 and allow them to spend it or loan it for the
| benefit of hurting businesses and the economy and allow the
| taxpayers to make interest.
| TAForObvReasons wrote:
| A Congressman made the same criticism: https://twitter.com/Re
| pThomasMassie/status/12435656548814684...
|
| > 2 trillion divided by 150 million workers is about
| $13,333.00 per person. That's much more than the $1,200 per
| person check authorized by this bill.
| throwaway_USD wrote:
| But even the Congressman is overlooking the fact that the
| stimulus bill was $6T, not $2T, the additional $4T went
| straight to the FED.
|
| Now the Congressman did divide the $2T by 150M to account
| for workers only; whereas, I divided $6T by 331M (as a
| rough estimate for total US citizens). Otherwise my number
| would be closer to $37,000 per US worker (as opposed to
| $18,000 per citizen)
| tantalor wrote:
| Your analogy is only true _on average_. In reality, most
| people are not net losers, but some (with high savings) stand
| to "lose" a lot.
| enchiridion wrote:
| Why do you say that? Because of inflation?
| __s wrote:
| People who didn't have 18000 to begin with didn't lose
| 18000
| JumpCrisscross wrote:
| > _Government indebted every US taxpayer $18,000+_
|
| You're confusing monetary and fiscal policy, as well as
| collateralised loans, asset purchases and grants, in a way
| that makes the sum meaningless.
| dahfizz wrote:
| The fed buying assets is not the same thing as giving away
| money.
|
| A better analogy would be "why not lend money to people instead
| of businesses?". Here the answer is more clear: people are not
| in need of someone to give them loans. If you need a loan, you
| can probably get one.
| coliveira wrote:
| The ruling class will not let money go directly to people, they
| prefer to use the "trickle down" illusion.
| nicbou wrote:
| Is there any backing to this claim beyond "it's pleasant to
| hear"?
| throwlaplace wrote:
| yes - it's called history and not being blind to the forest
| over the trees. you can literally look back to the
| beginning of this country and see policies that were double
| speak. the revolutionary war itself was essentially theater
| for distracting poor people from the lucre of the
| wealthy[1]. we know this because that is the work of
| historians - to unearth the truth in retrospect. there are
| direct quotes from "founding fathers" about the intent of
| the war. it's also why, for example, native americans and
| slaves fought on the side of the british (both were
| promised freedom).
|
| [1] howard zinn's people's history of the united states
| malandrew wrote:
| Going directly to people does not maintain jobs for people to
| return to.
|
| You know that saying about teaching a man how to fish.
|
| Saving the businesses is the same as grabbing the fishing rod
| so the fish don't pull it into the ocean and the man has no
| rod to return to.
|
| Giving it directly is giving the man a fish so he feeds
| himself for a day (something we are also doing with $1200
| checks).
|
| If we don't grab the rod and save it, we're stuck feeding the
| man for many days, until there is another rod available to
| use.
|
| You may ask "Why not just buy the man a fishing rod?"
|
| Well because there is no rod and rods don't scale to support
| a population of 330 million people. We're past the point in
| our economy where everyone can sustain themselves solo. It's
| more like fishing nets (companies) that each require dozens
| to thousands of people to operate to pull in a catch.
|
| We're saving the fishing nets.
|
| We lose enough fishing nets and soon enough there won't be
| enough fish to collect as tax and redistribute to those we
| need to feed for a day. The ability to hand out anything at
| all is backed by the fishing nets and the people operating
| them. You need to save both.
| triceratops wrote:
| Businesses are legal fictions. Even if they go bankrupt,
| their assets, employees, and IP will continue to exist and
| can be used to start new businesses.
| mywittyname wrote:
| There's a reason you see same companies going into
| bankruptcy every few years or so. It's relatively cheap
| to acquire a failed company and shore up their
| financials.
|
| Once that's done, you can loan their stock back to them
| at an inflated price, then file for an IPO. Things are
| good for a few years, until they can no longer make their
| loan payments, then they go bankrupt again and the
| bondholders acquire the assets of the failed company,
| lather, rinse, repeat, until there's no longer a viable
| company left, and the brands & IP are liquidated by the
| court.
| throwlaplace wrote:
| >If we don't grab the rod and save it, we're stuck feeding
| the man for many days, until there is another rod available
| to use.
|
| the man doesn't have food now. not 6 months from now when
| your fishing line untangles. what do you do?
| malandrew wrote:
| Give them the minimum number of fish for them to survive
| as a stopgap (two $1200 checks, some extra conditional
| $600 checks and unemployment).
| throwlaplace wrote:
| these kinds of solutions always assume there isn't enough
| slack in the system to give more than the minimum when
| it's clearly not the case because all of the fed models
| have slippage factored in. but no when it's welfare
| absolutely every penny has to be accounted for.
|
| >some extra conditional $600 checks
|
| conditional on what? literacy? drug tests? skin color?
| why conditional at all?
| malandrew wrote:
| > conditional on what?
|
| I don't remember. I think it might have been for
| dependents. Go read the text of the first bailout bill.
| It's all there.
| arbitrary_name wrote:
| >We're saving the fishing nets.
|
| No. We are saving the owners of the fishing nets. The
| companies can (and likely will) fire the employees to save
| themselves. Which should beg the question: why does the
| owner of the company get the money, and not his customer
| (who is generally also his employee)? Because we want to
| save capital formation as it was pre-COVID, instead of
| letting consumers provide the incentives for capital to
| reformulate to adjust to new market realities.
|
| The reason we persist with the 'freeze the system in place'
| is 1) We assume the capital class are more capable of
| redistributing money than the labor class (I think the
| current approach will favor major corporations and erode
| the market dynamism that has generally typified the US
| economy) 2) We assume that the costs of capital destruction
| are higher than the costs of damage done to the labor class
| (I think this is faulty) 3) The capital class have taken
| over the means of distribution and decision-making
| apparatus (this is inarguable, and is the primary reason
| the bailout has been shaped so favorably for capital
| instead of labor).
|
| More ossification of the US markets. More preferential
| treatment for the politically and economically well
| connected. More penury for the lower and middle classes,
| especially the younger generations trapped under a growing
| debt burden without the opportunities to escape from under
| it.
|
| Glad I have another citizenship and the resources to bail
| if it plays out the way I think it will.
| phkahler wrote:
| >> Going directly to people does not maintain jobs for
| people to return to.
|
| Normally it's the best way to inject money into the
| economy. Right now the best thing to do would be to suspend
| rents and debt repayment obligations.
| malandrew wrote:
| It's an idea and definitely worth exploring, but my gut
| tells me that that is both far easier said than done and
| it likely comes with many unintentional consequences that
| we should figure out first.
|
| One challenge is that the world is run by software. I
| have no clue how we would begin even modifying everything
| to account for such a dramatic change so broadly. Also,
| who do we suspend this for? Everyone? Only those that
| can't pay? This solution gets very messy very fast due to
| the layers upon layers of creditors, who themselves may
| have creditors. Among those creditors it's likely you can
| count both the American government and regular Americans
| (people with pensions and 401k's).
|
| One of the potential consequences that concerns me is
| what all those creditors do when this is all over? Is
| there any a new element of risk (suspension of payments)
| that gets priced in that makes all credit more expensive
| in perpetuity? Is more expensive credit in perpetuity
| more expensive than the solutions we're pursuing? Do the
| creditors pull out of the system entirely and move their
| money to systems that didn't suspend rent and debt
| repayment obligations? I really don't know, but doing
| that is uncharted waters that should not be taken lightly
| since there may be consequences worse than the solution
| we're pursuing.
|
| All the solutions are going to be imperfect. Generally
| those solutions that leave the machinery intact are
| easier to manage and reason about. Messing with the
| machinery in a time of crisis is generally inadvisable.
| It's the equivalent of changing code live in production.
| coliveira wrote:
| Nobody thinks slowly and hard about the consequences when
| it is time to give trillions of dollars to Wall Street
| banks.
| pjmorris wrote:
| > Going directly to people does not maintain jobs for
| people to return to.
|
| Every one of the 16 million people who've lost jobs in the
| last month has some combination of rent, mortgage, food,
| insurance, and other expenses that they spend money on.
| Receiving that money is how many companies need to stay in
| business. Giving the money to the companies doesn't
| necessarily provide people with their material needs. Money
| given to people gets spent in to the real economy. Money
| given to companies might trickle down in to the real
| economy, but it also winds up just pumping up the financial
| economy, inflating balance sheets and asset prices, not
| necessarily providing anything anyone needs.
| malandrew wrote:
| I don't know why I'm replying but if you read my entire
| comment, you'd see that your concern is addressed: some
| of the bailout is going directly to the people to address
| those needs.
| xhrpost wrote:
| Been wondering this myself. In my mostly uneducated mind,
| something to remember is that if you "print" money and give it
| to people, there's no way to really get it back (that is,
| control the money supply in both directions). Sure you could
| just increase taxes but taxes can't even cover the budget, let
| alone decrease the money supply.
|
| If the Fed instead purchases assets such as MBS, corporate
| bonds and especially Treasury bonds (yes, the biggest owner of
| US government debt is actually the US government), those assets
| can later be sold. The Fed can then pull the money back out of
| the supply for future use. Assuming of course that high risk
| MBS and junk corporate bonds don't expire worthless.
| [deleted]
| AngrySkillzz wrote:
| Fed does not have the authority to do that, per se. Fiscal
| stimulus is congress and the Treasury's job. Monetary policy is
| a completely different thing. The Fed is already buying
| Treasury bonds, which are in part being used to fund the direct
| stimulus measures in the form of PPP grants/loans, unemployment
| payments, and the $1200 check. In addition to buying PPP loans
| themselves. So the current situation is about as close to what
| you are suggesting as is legally possible.
| claudeganon wrote:
| Because America is built around the primacy of authoritarian
| corporate structures. Disintermediating them through sustained
| direct payments to individuals or even states would upend these
| businesses' stranglehold on workers and our democracy.
| rb808 wrote:
| > We could give money to people/government directly. Why create
| money as private debt?
|
| Effectively it is. Government borrows money from the Fed and
| pays everyone a $1200 stimulus check.
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