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

#311

Post by icelancer » Mon, Mar 23, 2020, 7:52 PM UTC

xyzzyz wrote: post #286

jkhdigital wrote: post #256

Earlier quoted context omitted.

Except that people didn't have to save for decades to afford houses before the advent of the 30-year mortgage. Debt is risky, period. Someone has to pay for that risk when bad things happen and the debt cannot be repaid. Also, people respond to incentives. When individuals and companies are allowed to keep all the profits from their risky activities, but are shielded in whole or in part from the losses, they will res…

> Except that people didn't have to save for decades to afford houses before the advent of the 30-year mortgage. There is a certain truth in that the ballooning housing prices in many places have a lot to do with availability of credit to the buyers. At the same time, if you're planning to build a new house, you'll find that the costs of building itself are also high. Quite simply, building requires lots of labor, an…

People also pay for unemployment insurance and the other things you mention through taxation.

The moral hazard you are deftly sidestepping is the fact that bonds/loans do not operate the same way for an individual with collateralized debt vs. a large corporation. And thus, a large corporation can - and does, occasionally - act in accordance with those incentives by assuming bailouts are coming after a black swan event.

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

#312

Post by icelancer » Mon, Mar 23, 2020, 7:53 PM UTC

Blackthorn wrote: post #263

talentedcoin wrote: post #194

Earlier quoted context omitted.

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.

Exactly. If your business was so dependent on rolling over bonds that you go bankrupt/de-lever massively in a 3-6 month window... how strong was the business?

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

#313

Post by tylerhou » Mon, Mar 23, 2020, 7:54 PM UTC

Hokusai wrote: post #293

tylerhou wrote: post #288

Earlier quoted context omitted.

> Someone has to eat the losses, and in an actual free market there are two options: the equity holders, or the bondholders. The equity holders are eating the losses; have you seen the stock market? > Now, the Fed provides a third option: the holders of U.S. dollars, whose currency is devalued as money is printed to paper over the void which was opened up by the pandemic. And so the charade will continue. Money is be…

> The equity holders are eating the losses; have you seen the stock market? This is a misconception. Loss or profit only happens when you sell your assets. Until then it is just economic potential. The trend of not paying dividends is at fault here. When you do not care about dividends but perceived future growth to earn money there is an incentive to over-commit and increase risk above any reasonable level. Adding t…

> Loss or profit only happens when you sell your assets.

This is a meme phrase; losses absolutely do happen before you sell your assets. (If I bought Enron at $90 and never sold, I didn't lose any money, right?)

> "American Airlines spent $13 billion on share buybacks for 10 years through 2019". They should have used that money more wisely. Why should the taxpayers give money away

You have two misunderstandings here. The Fed is not bailing out American Airlines by giving money away. That has to go through Congress. (I have no claims about whether bailing out AA is a good decision or not). Bailouts also generally are not free giveaways; the government often takes equity stakes.

> or lent money at close to zero interest

The Fed is lending everyone money at 0% to avoid a recession. Regardless of whether AA previously bought back their stock, they could still borrow at 0%. The Fed is doing this because the alternative (letting everything crash) is much worse.

> when the companies had the money and dedicated it to artificially increase share prices?

Share buybacks do not "manipulate the market" (not your words, but common phrasing among anti-buyback advocates) and artificially increase share prices. They return capital to shareholders. The share price goes up because the stock now represents a better return on investment (when AA buys back stock, it no longer a bunch of market cap tied up in money uselessly sitting around in a money market account).

When times get tough, AA can sell equity for more money, which is a stock buyback but in reverse. That's what could happen here. This ebb and flow (raising capital by issuing shares when you need it, returning capital when you don't) is the whole point of equity markets.

See https://www.bloomberg.com/opinion/articles/2020-03-17/the-go... for a more comprehensive argument about why share buybacks for airlines are more rational than holding money for a rainy day.

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

#314

Post by toufka » Mon, Mar 23, 2020, 7:55 PM UTC

helen___keller wrote: post #278

jkhdigital wrote: post #265

Earlier quoted context omitted.

> 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 strengthe…

> A business with zero debt financing would not go bankrupt during this crisis There are fixed obligations that can exist outside of debt financing. Rent, for example, is one that everybody is familiar with. Anyways, I generally agree that helping the employees is more important than saving the businesses. If a business does die, it hurts some current investor or proprietor and benefits some future investor or propri…

I think the current argument is that the fastest, easiest, simplest way to help employees, is to make sure they don't get fired. And the easiest way to do that is to make sure the businesses don't feel the need to fire them (to either cover those fixed obligations, or to plain shut down). Give the businesses 8% more cash (by removing payroll tax), you might allow the business to survive a month-long slump, and not fire anyone.

This would seem a good strategy if the issue was simply a month of lost productivity, with an otherwise healthy business. And where the game theory would lend itself towards the business owners knowing this, and so choosing to not fire anyone. And where the 'lost efficiency' of shuffling around ownership would be significantly greater than the short term loss. If those are not true, and the business then fires its employees anyway, it really was just a gift to the business owners, and would be a failure.

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

#315

Post by icelancer » Mon, Mar 23, 2020, 7:57 PM UTC

dredmorbius wrote: post #24

alexmingoia wrote: post #12

Earlier quoted context omitted.

Why can’t they survive by issuing corporate bonds? And as far as I know this Fed policy isn’t to buy failing stock it’s to inject cash overall through treasury bonds, since the Fed isn’t allowed to buy stock.

Because: 1. Nobody would buy them. 2. Small biz doesn't have access to corporate paper markets, even in the best of times.

>> 1. Nobody would buy them.

Sure they would. If you price it correctly.

>> 2. Small biz doesn't have access to corporate paper markets, even in the best of times.

Not true. I am a SMB owner and have secured a LOC for my business as well as refinancing of my house personally. It's out there. Just at prices you might not like. But then again, we aren't guaranteed good prices. Or at least, we shouldn't be.

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

#316

Post by lend000 » Mon, Mar 23, 2020, 8:00 PM UTC

This is a recipe for stagflation -- economic slowdown (inevitable, and by choice, in response to the circumstances) with excessive liquidity in the market. The capital injections aren't going to open up restaurants until shutdown orders have been lifted, and even then, you're kidding if you think small businesses will materially benefit from Fed actions.

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

#317

Post by bjourne » Mon, Mar 23, 2020, 8:16 PM UTC

helen___keller wrote: post #226

cs702 wrote: post #186

Every decade or so, with regularity, the world seems to go through a significant economic or financial crisis triggered by some or other "unexpected" shock: * 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…

You are framing the situation as if there only would be two options; do nothing or pump trillions of dollars into financial markets. But there is a third option. Use those trillions of dollars to take care of the people hurt by the crisis. Provide unemployment benefits and free healthcare to the people affected. The money could also be used to fund a jobs guarantee program. For example, to construct a high-speed rail network or to build homes to solve the homelessness crisis.

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

#318

Post by ForHackernews » Mon, Mar 23, 2020, 9:04 PM UTC

jkhdigital wrote: post #243

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…

> 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 holders of U.S. dollars, whose currency is devalued as money is printed

I know that's what the macroeconomics 101 textbook says, but is there any empirical evidence this actually drives higher inflation?

We've had historically low inflation for over a decade now[0], a decade during which the Fed has undertaken successive rounds of QE to the tune of $40-$85 billion per month.[1]

[0] https://www.usinflationcalculator.com/inflation/historical-i...

[1] https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1,_QE...

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

#319

Post by xyzzyz » Mon, Mar 23, 2020, 9:05 PM UTC

icelancer wrote: post #309

xyzzyz wrote: post #229

Earlier quoted context omitted.

For the exact same reason why it’s legal for individuals to take 30 year mortgages. Would you prefer world where you first need to save up for decades before being able to stop renting? It’s the same with businesses: they take loans, because they allow them to make money now, and it works just fine in normal times without an actual pandemic and forced lockdown of everything.

Huh? If I default on my mortgage due to this pandemic, the loan is collateralized and the house is seized / a lien is put on it. Why, then, do corporations get to avoid their collateralized downfall?

The government can require collateral, or equity with liquidation preferences, that's totally fine by me. I thought the issue raised by parent poster was why companies require so much debt for their operations, and the answer is, of course, that it makes perfect sense in most scenarios other than global pandemic and shutdown of everything.

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

#320

Post by RealityVoid » Mon, Mar 23, 2020, 9:07 PM UTC

jdkee wrote: post #266

jkhdigital wrote: post #243

Earlier quoted context omitted.

> 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?

My feeling is that the answer to this is because these companies (arguably) produce something of value to the world. Letting them become bankrupt would mean they do not produce that something of value so that would be bad economics. And a case of not seeing the forest for the trees. The role of economy is to sustain a certain confort to the population, an people should forget that at their own peril.