Earlier quoted context omitted.
but isn't loans defaulting (risk) the original reason for having interest?
Yes.
And that’s why it’s so close to zero - because there’s the gov/fed safety net.
Federal Reserve pledges asset purchases with no limit to support markets
261–270 of 368 posts
Re: Federal Reserve pledges asset purchases with no limit to support markets
#262Earlier quoted context omitted.
It is 110% not good to have any major corporation go into a technical default. We are talking about companies which have plenty of assets and strong businesses. That's where the problem lies. Who is going to decide that? Traditionally we have debt markets for that.
The biggest problem at the moment is the debt markets have almost completely stopped functioning. Let me repeat what the other poster said: “We are talking about companies with plenty of assets and strong businesses”. And they still can’t get needed short term financing. Should we let clearly creditworthy companies go bankrupt because the credit markets are temporarily closed?
Well, yes, if you define "appropriately pessimistic bond markets" as "non-functioning", sure.
These aren't sound businesses, because the current virus is going to screw them.
Re: Federal Reserve pledges asset purchases with no limit to support markets
#263Lots 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…
Thank you for putting it so well. Keeping the corporate bond market going does not sound like a noble goal on its face but it's vital in so many respects. I appreciate (and indeed once shared) the knee-jerk libertarianism of the people saying "let them fail", but this view does not fully appreciate the consequences of allowing a violent deleveraging such as we're experiencing now to continue indefinitely.
There's no indication that they would actually deleverage if bailed out in this fashion.
FFS, these "strong businesses" are so extremely fragile that they are liable to go bankrupt because they can't roll over some of their debt. And now the Fed just wants to let them roll it over again consequence free.
Re: Federal Reserve pledges asset purchases with no limit to support markets
#264How does injecting money solve a problem that’s not caused by lack of money? This market downturn isn’t a lack of liquidity, or a lack of money, or toxic assets like the mortgage backed securities. People aren’t going to stores, restaurants, and airlines because of SARS-CoV-2, not a lack of credit or money. Printing money isn’t going to create customers for businesses effected by this pandemic.
> How does injecting money solve a problem that’s not caused by lack of money? Not an expert on this but decreased money velocity (the thing we witness right now) can be seen from the outside in fact as "lack of money".
If low V is due to businesses not being able to get loans when they're sound, sure, that could be called a problem of lack of money.
If low V is due to exogenous factors -- like a virus making their products ultra-low-demand -- then no, that's not a problem of lack of money.
Re: Federal Reserve pledges asset purchases with no limit to support markets
#265Every decade or so, with regularity, the world seems to go through a significant economic or financial crisis triggered by some or other "unexpected" shock: * The current crisis, starting now, in 2020; * The global financial crisis from 2008 to the early 2010's; * The dotcom, telecom, and tech bust of the early 2000's; * The Asian debt crisis of the late 1990's; * The Latin America debt crisis of the 1980's; * The oi…
I mean, actions by the Federal reserve and congress are both part of the system so it's a little unfair to say the system should work without government intervention. Particularly this time around, healthy and well run businesses following reasonable best practices are being decimated. And why shouldn't they? A large percentage of our economy was just shut off. Add in leverage - which isn't inherently a bad thing - a…
> healthy and well run businesses following reasonable best practices
A business with zero debt financing would not go bankrupt during this crisis, but they would still have to lay off employees in the meantime, and those employees might "starve" without another source of income.
I really, really don't understand the need to bail out companies here. If the problem is a loss of income for the employees, then strengthen unemployment insurance. If the underlying business was sound, then it will start back up again when the crisis is over. If the owners of the business were leveraged and cannot sustain debt payments during the crisis, then they can go into bankruptcy protection and emerge with new ownership.
Re: Federal Reserve pledges asset purchases with no limit to support markets
#266Lots 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…
> We are talking about companies which have plenty of assets and strong businesses. We are also talking about companies that are leveraged to the tits to juice their return on equity. What is glossed over in all of these discussions about bailouts is that the managers of these corporations respond directly to financial incentives, and the existence of a "lender of last resort" such as the Fed ensures that corporation…
"the existence of a "lender of last resort" such as the Fed "
This. The moral hazard here is enormous. And why should the Fed serve the interests of equity owners over the national interest in a strong, reserve dollar?
Re: Federal Reserve pledges asset purchases with no limit to support markets
#267Keep in mind they're only able to buy US treasuries and mortgage backed securities. If Congress changes the rules to allow the Fed to purchase stocks, we'll be in for some very interesting times. It could be that we get an economy of zombie companies, or valuations soar beyond what we've come to expect as normal. In any case, this is unprecedented and in my opinion not the right move. They're sacrificing our future i…
> They're sacrificing our future in order to inflate stock prices now You're trivializing the issue. It's not just "inflating stock prices". Credit markets that are required for the basic functioning of the economy have completely frozen up. Companies that are completely solvent can't meet short-term obligations because the commercial paper market has frozen. Money market funds, which are basically savings accounts,…
> the commercial paper market has frozen
This is similar to when companies continually complain about a "talent shortage" from not able to hire people, when the real reason is that they just don't want to pay market rates. There is an easy answer to obtaining business credit - pay the current interest rates, which have gone up due to uncertainty. Instead, the Fed is telling everyone that interest rates are even lower because they want to perpetuate the stock market bubble.
Re: Federal Reserve pledges asset purchases with no limit to support markets
#268Earlier 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…
It stops the stock market slide. Apparently it doesn't, markets are down, in spite of the promise of infinite money. I think whether we bounce back quickly will depend on how the next few months go and whether countries manage to contain the virus in time or it starts to overwhelm healthcare systems.
> Apparently it doesn't, markets are down, in spite of the promise of infinite money.
All of the funny money in the world won't answer these questions:
1. will a given firm exist in 12-24 months?
2. will anyone want to buy anything from that firm (or that firm's customers)?
3. when will anyone want to buy anything that is not the roof over their head, food or toilet paper?
Re: Federal Reserve pledges asset purchases with no limit to support markets
#269Lots 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…
This is acceptable as long as the billionaires all take big haircuts this time. In 2008, they paid themselves huge bonuses while Main St. got evicted. Not happening this time! Pitchforks, torches, and nooses if necessary.
Do you have some data to back up the theory that they all paid themselves huge bonuses? Most billionaires lost huge amounts of money as their wealth was in the market and in real estate so when that crashed so did their net worth. The ones who paid themselves bonuses were the wall street bankers who received bailouts from TARP. To be clear less then 20% of the worlds billionaires made their fortunes via finance.
Re: Federal Reserve pledges asset purchases with no limit to support markets
#270Earlier quoted context omitted.
The most recent episode of the Neoliberal Podcast covered this in layperson's terms. Despite being pro-helicopter money, they point out that the bureaucracy to do so isn't in place and that there isn't precedent/procedure for FED action of this kind. So for now the FED is using all of the tools it's used to and waiting on congress to act, hopefully with helicopter money but it will be slow even if the current argumen…
Is this, in some sense, by design?
Absolutely.