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Federal Reserve pledges asset purchases with no limit to support markets

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171–180 of 368 posts

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

#171

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…

We're about to see what works best, it appears Denmark is doing a multipronged approach that includes paying reduced salaries for the entire working population of Denmark for three months. https://www.theatlantic.com/ideas/archive/2020/03/denmark-fr...

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

#172
post #134

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…

> 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…

Another problem is the bonds are traded on the open market and many asset managers are forced to sell as soon as they drop below investment grade as a function of their investor agreements. So we’d really have to just pause the entire market.

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

#173
After the crisis is over, they’ll just do the same thing again, inflate a new bubble, faster this time, which will once again explode, and bail it out again on the backs of working Americans. There’s no learning curve at all. They think the problem is that they didn’t inflate the bubble fast enough and with enough leverage. But, this is probably what we should expect. It’s a repeated pattern throughout history that when things go wrong, leaders usually don’t try new approaches- instead they just keep doubling down on what they were doing before, thinking that the problem was that they just need to do whatever they were doing before, but more. It takes a total collapse, historically, for true behavioral change to occur. The whole society, like a drug addict, has to hit rock bottom.

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

#174
post #134

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…

> 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…

No. That'd be considered an unconstitutional "taking" of the economic rights from people relying on those contractual terms. See Eastern Enterprises v. Apfel, 524 U.S. 498 (1998).

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

#175
post #153

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…

You are completely skipping over the basics. If someone doesn't pay then someone else doesn't get paid. You merely shifted the problem to somewhere else. That somewhere else is usually something extremely critical such as the banking system.

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

#176
post #134

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…

> 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…

> would it be possible for the government to just... suspend the activation of financial covenants generally for a while

Changing the rules of massive bilateral agreements to benefit one party over another tends to blow confidence in the system. Investors would start trying to guess which asset class will next be amended, thereby triggering runs across the market. (We see this when governments start expropriation processes in previously-stable economies.)

It also does nothing for e.g. a company with good receivables that can't make payroll or interest payments because its good commercial paper isn't being purchased. It's in a liquidity problem, not a solvency one. But if the liquidity problem persists, the firm will go insolvent.

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

#177
post #54

Earlier quoted context omitted.

Current problem is that money right now will be evaporating when loans default. The financial system is built on itself so that loans create money. It does not expect to come to a grinding halt. If it does, loans aren't repaid, and money literally disappears. Deleveraging occurs. Wealth disappears. I think the aim is that we don't lose money from defaults over the short term.

If the government wanted to so decree, they could decree banks could not forclose on bankrupt customers and must restructure loans. They've already done that for rent and mortgage agreements in many areas where people are hard hit by this. That would stop the loss of money right there. The market is demanding liquidity to be able to manuver an uncertain future; this has caused an effective collapse of the credit mark…

> If you have cash going into this downturn, now's the time to start plotting where you are going to invest it for maximal gains

If much of this money is effectively going into the stock market - either via credit to public corporations or direct stock purchases by the Fed - is that most likely where maximal gains might occur?

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

#178

I'm reminded of this story of the Federal Reserve on 9/11: https://www.dailykos.com/stories/2014/09/10/1328813/-The-Ast...

I worked for the FRBNY for 24 years. They always took disaster recovery and business continuity very seriously. We planned (and practiced several times a year) for NYC to be gone, the northeast to be gone, and for the whole east coast to be gone.

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

#179

Earlier quoted context omitted.

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.

QE is revenue neutral in theory just like helicopter money along with taxing that same amount back on a future date is revenue neutral in theory. In practice it is more like "buy $4 trillion worth of assets with created cash and never be able to sell it for fear of creating a liquidity crisis": https://fred.stlouisfed.org/series/WALCL .

And they buy assets at whatever price is required for the financial institution to remain solvent. At least, that's what happened during the mortgage meltdown.

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

#180
post #153

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. 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.

I see covenants as important here because they're the component of the financial system that's most rigid and non-responsive to changing market conditions. The point of a covenant is to make a contract more inflexible, by declaring a point beyond which a creditor just won't accept "slack" in the debtor's performance.

If you take covenants out, contracts become inherently more negotiable. And that's important, because frequently creditors have less pressure on them to perform, in exactly the same circumstances that cause debtors to face more challenges; and so creditors often find that their best option, EBITDA-wise, is to eat the losses from the challenges that their debtors are facing, rather than destroying their debtors through liquidation in a way that gets them, in the end, less money.

You know how, right now, corporations are more willing to release previously-withheld "bad news", because they can blame their lack-of-performance on a suspension of work due to the virus? Those corporations are creditors, not just debtors (esp. in commercial paper); and the "slack" they earn like this, they can pass on to their debtors (e.g. other corporations)—but only if contracts work the "normal" way, that you see in small-scale non-covenanted contracts.

In such non-covenanted contracts, where when the regular contract isn't working out, frequently the best thing to do isn't to sue for breach, but rather to just sit down and renegotiate the contract. That's what's going on right now all over the place—contracts between e.g. landlords and renters, or between suppliers and retailers, are being renegotiated, just for this temporary period, to the benefit of both parties. (Another good example, more generally, is personal debt forgiveness: debtors are willing to accept a renegotiation of a loan to an individual, over the much-less-likely chance of ever claiming the full original loan amount.)

With a covenant in place, though, one party has no incentive to sit down to renegotiate (and in fact, that's what they wanted to avoid by adding a covenant); and instead can just pressure the other party to do drastic things like liquidation in order to fulfill the secondary contract stipulations under the covenant-breaking clause.

Wouldn't it make sense to—temporarily!—take away the tool by which funds/banks/institutions force their debtors to liquidate, and instead force them to do the thing they'd have done if that tool wasn't there: to renegotiate performance expectations, to get what return they can get; and then, in turn, have those funds/banks/institutions renegotiate their performance expectations with their creditors?

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