Federal Reserve pledges asset purchases with no limit to support markets • Hacker News Board

Re: Federal Reserve pledges asset purchases with no limit to support markets

#151

Post by resters » Mon, Mar 23, 2020, 3:18 PM UTC

matthewdgreen wrote: post #40

CyanLite4 wrote: post #23

Earlier quoted context omitted.

It stops the stock market slide. Which is more valuable than political talking points. Eventually these bankers are going to start doing some math and see that with 0% interest rates and unlimited firepower on Treasuries, there’s going to be massive pent up demand after this medical crisis is solved. Money will be lent to everyone, including airlines and leisure companies because there’s simply no where else to put t…

I think it's just as likely that the markets will simply stop performing any sort of useful price discovery function, leading to huge misallocations of productive resources -- resources we desperately need right now.

This is actually the goal, to prevent price discovery and to make it less likely that the political system would require firms to use adequately cautious levels of underwriting capital.

The perverse incentive for firms is that the more accurately they structure their financials to be highly vulnerable to systemic risk, the more likely it will be that the decision to do so will be rewarded by policymakers.

Simply put, capitalism isn't capitalism without firm failure and an very clear winners and losers when unexpected events occur. The US economy, which people think is capitalism, is nearly as nationalized and intertwined with government capital as China's economy.

In my view, if we're not going to have capitalism, then we should have a system that is significantly more fair and generous to those in need. If average peoples' life savings are at risk, so too should be banker and executive bonuses (and even jobs).

One can only imagine how much stronger the US economy would be today if the 2008 crisis had led to the smart decision makers being rewarded and the stupid ones being bankrupt. Instead, we had the opposite situation, where the stupid investors got bailed out and the smart ones had their well deserve gains slashed by government policy.

Re: Federal Reserve pledges asset purchases with no limit to support markets

#152

Post by chrisjarvis » Mon, Mar 23, 2020, 3:19 PM UTC

Spend 11 years buying back stock instead of saving anything then immediately bailed out at first sign of trouble.

Private profit, public risk. 'Tis lame.

Re: Federal Reserve pledges asset purchases with no limit to support markets

#153

Post by derefr » Mon, Mar 23, 2020, 3:20 PM UTC

Danieru wrote: post #141

derefr wrote: post #134

Earlier quoted context omitted.

> It is 110% not good to have any major corporation go into a technical default. Q: rather than going into debt, would it be possible for the government to just... suspend the activation of financial covenants generally for a while? Enact a law putting a temporary patch on how contract law works vis-a-vis financial instruments? Something like... any covenant with triggers written after date X would now be required to…

Trying to "pause" commitments would take years to implement. It would be like trying to go through the world's internet and "suspending" all user requests and server processing. Instead the Fed and US government have a much simpler and near instant tool: act as the lender of last resort. A bonus feature of this implementation is it costs not much money. Big corporations have lots of assets and the government is sure…

> Trying to "pause" commitments would take years to implement. It would be like trying to go through the world's internet and "suspending" all user requests and server processing.

I don't see the parallel.

Covenants, ultimately, have to be enacted through the courts. (I mean, presuming debtors' legal departments get the message from the government that they don't have to worry about covenants during this period, whatever their creditors demand. The creditors would ultimately have to take them to court to attempt to get their covenants enforced.)

And, if the covenant enforcement hits the court system, then the government would already be "in place" to suspend traffic—it's "the wire" that court-system messages are flowing through!

(Or, really, it's more like a judge is a router and the legislature controls a WAF module in said router. The judge, as router for motions, is required to deny any motion the law-as-WAF declares as illegitimate.)

Re: Federal Reserve pledges asset purchases with no limit to support markets

#154

Post by dredmorbius » Mon, Mar 23, 2020, 3:20 PM UTC

JumpCrisscross wrote: post #107

burroisolator wrote: post #70

I fail to understand why any economist would prefer QE over helicopter money. Give everyone a check. If they need it to purchase everyday goods and services, great. If their everyday needs are fulfilled already, they will invest that money into stocks, bonds, treasuries, etc, adding the needed liquidity to the market. I understand if you're against the idea of giving people money. But this is just giving money to mos…

> Give everyone a check The Fed doesn’t have the legal authority to do this. That’s why the Congress is passing stimulus bills. The Fed is focussing on our liquidity problem. That keeps solvent companies from going under due to illiquidity. Congress, and helicopter money, are needed to solve the solvency problem prompted by demand destruction.

More specifically:

- The Fed operates under a dual mandate. It is tasked with managing both inflation and unemployment.

- Its mechanisms are "open market operations" (the purchase and sale of assets, usually government bonds, though occasionally other securities), "the overnight window" (a lending operation for banks needing cash, lent at a benchmark "prime" interest rate), and bank reserve requirements.

These adjust the total amount of dollars in the financial system, the basis for interest rates (the cost of renting money), and the multiplier by which banks themselver create money through loans.

Re: Federal Reserve pledges asset purchases with no limit to support markets

#155

Post by JumpCrisscross » Mon, Mar 23, 2020, 3:20 PM UTC

burroisolator wrote: post #145

JumpCrisscross wrote: post #107

Earlier quoted context omitted.

> Give everyone a check The Fed doesn’t have the legal authority to do this. That’s why the Congress is passing stimulus bills. The Fed is focussing on our liquidity problem. That keeps solvent companies from going under due to illiquidity. Congress, and helicopter money, are needed to solve the solvency problem prompted by demand destruction.

Why wouldn't helicopter money solve the liquidity problem? Imagine you're a rich investor and you get a check from the government. You see a Company X that is suffering from liquidity issues but otherwise is doing great. Company X's stock is now plummeting because of fears of its insolvency. You, along with other investors who also received checks from the government as part of this helicopter money policy, decide to…

> Why wouldn't helicopter money solve the liquidity problem?

One, it is not targeted. The Fed can pump vast quantities of liquidity into the heart of the credit markets in a way private actors aren't set up to.

Two, it is not fast enough. Companies will go bust while waiting for politicians to authorize a cheque, the Treasury to cut it, investors to cash it and then to identify and decide upon an investment.

Three, it isn't reliable. Investors trust the Fed's discount window will be open in a crisis. That knowledge, itself, stops many runs before they start.

Four, it's riskier. Helicopter money cuts cheques. Once it's done, the money is out the door. The government is never getting it back. If they sent out too much, we'll have inflation. Monetary policy involves collateralized loans. The collateral limits downside. And unwinding a loan is easier than raising taxes to drag surplus cash out of the economy.

Re: Federal Reserve pledges asset purchases with no limit to support markets

#156

Post by resters » Mon, Mar 23, 2020, 3:20 PM UTC

partiallypro wrote: post #120

CyanLite4 wrote: post #23

Earlier quoted context omitted.

It stops the stock market slide. Which is more valuable than political talking points. Eventually these bankers are going to start doing some math and see that with 0% interest rates and unlimited firepower on Treasuries, there’s going to be massive pent up demand after this medical crisis is solved. Money will be lent to everyone, including airlines and leisure companies because there’s simply no where else to put t…

This has nothing to do with the stock market, it's to prevent the credit and treasury market from seizing up. The treasury market is not acting well, the spreads between bid/ask is really high...and this is supposed to be the most liquid market in the world.

Lack of liquidity is just firms stubbornly trying to force this kind of move to happen. Yes, marking down prices based on actual demand would result in a financial loss for some firms (and likely insolvency due to lax underwriting requirements), but there are also winners in that scenario who should be rewarded for anticipating the future.

Re: Federal Reserve pledges asset purchases with no limit to support markets

#157

Post by dredmorbius » Mon, Mar 23, 2020, 3:22 PM UTC

nostromo wrote: post #139

burroisolator wrote: post #70

I fail to understand why any economist would prefer QE over helicopter money. Give everyone a check. If they need it to purchase everyday goods and services, great. If their everyday needs are fulfilled already, they will invest that money into stocks, bonds, treasuries, etc, adding the needed liquidity to the market. I understand if you're against the idea of giving people money. But this is just giving money to mos…

QE is revenue neutral or positive. They buy an asset with created cash, and sell it later for a small profit. Helicopter money is revenue negative and the created cash cannot be recovered.

Sure it can: tax it out of existence. Or apply deflationary monetary policy; braise interest rates, increase reserve requirements, or sell bonds.

Re: Federal Reserve pledges asset purchases with no limit to support markets

#158

Post by airstrike » Mon, Mar 23, 2020, 3:22 PM UTC

Danieru wrote: post #126

Lots of voices missing the mark: the fed is acting to keep the corporate bond market from seizing up. Corporations finance part of their borrowings through bonds. These bonds need to be paid in full + the interest when the bond matures. Corporations and banks typically repay some of these from cash, and some by issuing new bonds. Right now no one is getting to issue new bonds at all. Banks cannot lend because the ris…

Also want to point out that if companies can't afford their expenses, they'll stop paying rent (usually a huge expense and one that is fairly easy to stop paying while still occupying the real estate)

Then landlords can't pay their expenses, and will default on their own payments

This trickles up all the way to the banks and could result in their insolvency, which is what the Fed is (rightfully) trying to prevent

Re: Federal Reserve pledges asset purchases with no limit to support markets

#159

Post by dillonmckay » Mon, Mar 23, 2020, 3:22 PM UTC

Frost1x wrote: post #75

roymurdock wrote: post #59

Earlier quoted context omitted.

it's not so our current president can get re-elected (Fed is largely independent of executive branch) but to prevent massive riots, social unrest, and ultimately a large amount of human suffering now at the cost of pushing it down the road

Agreed, these actions are to prop up the existing economic system. It's my opinion our economic system needs a major overhaul , one that is preppered to address real situations like this without setting unrealistic growth expectations across the board and better stabilizing the majority of the workforce/labor market. This national economic stress businesses are feeling is quite similar to the stresses a large portion…

American Gosplan.

Re: Federal Reserve pledges asset purchases with no limit to support markets

#160

Post by Danieru » Mon, Mar 23, 2020, 3:22 PM UTC

derefr wrote: post #153

Danieru wrote: post #141

Earlier quoted context omitted.

Trying to "pause" commitments would take years to implement. It would be like trying to go through the world's internet and "suspending" all user requests and server processing. Instead the Fed and US government have a much simpler and near instant tool: act as the lender of last resort. A bonus feature of this implementation is it costs not much money. Big corporations have lots of assets and the government is sure…

> Trying to "pause" commitments would take years to implement. It would be like trying to go through the world's internet and "suspending" all user requests and server processing. I don't see the parallel. Covenants, ultimately, have to be enacted through the courts. (I mean, presuming debtors' legal departments get the message from the government that they don't have to worry about covenants during this period, what…

Covenants are the smallest part of this.

Without the flow of money the funds/banks/institutions which own those bonds are in-turn going to default to their creditors.

Hence the internet analogy: you cannot just hack in a pause on your local machine. There is a world of complex interactions which would also need to be paused, so complex just figuring out who owes who would take years/decades.