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Federal Reserve pledges asset purchases with no limit to support markets

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

#331

Post by helen___keller »

bjourne wrote: post #317
helen___keller wrote: post #226

Earlier quoted context omitted.

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…

No, I'm not.

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

#332

Post by chii »

tylerhou wrote: post #313
Hokusai wrote: post #293

Earlier quoted context omitted.

> 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.…

> When times get tough, AA can sell equity for more money, which is a stock buyback but in reverse

so why are they not doing this, but instead asking for low interest loans? (https://finance.yahoo.com/news/airline-ceos-promise-to-elimi...)

The reason is that raising equity dilutes all current shareholders. It's a bigger "loss" to them than a termed interest loan which the tax payer gets minimal reward for taking on the risk.

I say, that any bailout loans _should_ come with an equity dilution component. Tax payers should get compensated, or this moral hazard will just continue into the future.

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

#333

Post by Hokusai »

tylerhou wrote: post #313
Hokusai wrote: post #293

Earlier quoted context omitted.

> 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.…

> This is a meme phrase; losses absolutely do happen before you sell your assets.

It is not a meme, is how accounting works, is how governments tax. If you look at your own example, some people though that they had made a lot of profit with Enron, if they did not sold the shares then they only got losses.

Because the you only win or lose money when you sell your shares (not counting dividends if any).

UK law: "You’ll need to work out your gain to find out whether you need to pay Capital Gains Tax.

Your gain is usually the difference between what you paid for your shares and what you sold them for." - https://www.gov.uk/tax-sell-shares/work-out-your-gain

Until you sell there is NO gains as price varies in function of time. And it can go up or down.

The other claims are more complicated. It's difficult to discuss them if common accounting knowledge is not understood.

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

#334

Post by chii »

xyzzyz wrote: post #319
icelancer wrote: post #309

Earlier quoted context omitted.

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.

> it makes perfect sense

it makes financial-risk/reward sense. But only because interest rates are at record lows, and there's evidence in the past that bailouts can happen for too-big-to-fail type companies. Essentially, these big employers can extort a country for a bailout, with the economy tanking as the weapon.

If they cannot rely on the interest being low, and if they cannot rely on a lender of last resort like the FEDs, i'm sure they will be more fiscally responsible.

Unfortunately, these risky behaviour these companies take are the result of years of poor monetary policy by the FEDs and lack of investment into increasing competition in all sectors of industry by the gov't.

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

#335

Post by chii »

thoughtstheseus wrote: post #330
grecy wrote: post #305

Earlier quoted context omitted.

Thanks for the detailed explanation. I really don't understand a lot of what's going on, I hope you don't mind a few beginner questions > these bailouts are going to happen. No one who understands what is at stack would choose to "let the house fall". Are the measures being taken now just adding another layer onto the "house of cards" as some people describe it? Will these measures just make it all fall harder at som…

It’s divided between 3 schools of thought (1) governments can just continue to prop up financial markets indefinitely (2) you can temporarily prop up these markets but you can and will want to unwind government intervention over time and (3) this is just going to make a huge bubble that will burst eventually. People say you can grow out of these problems... The Fed has an enormous amount of flexible firepower, it’s t…

(2) and (3) are basically the same thing.

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

#336

Post by afpx »

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…

So, what are the probable and worst case scenarios? Right now, it's hard to cut through the hyperbole.

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

#337

Post by perl4ever »

Hokusai wrote: post #333
tylerhou wrote: post #313

Earlier quoted context omitted.

> 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.…

> This is a meme phrase; losses absolutely do happen before you sell your assets. It is not a meme, is how accounting works, is how governments tax. If you look at your own example, some people though that they had made a lot of profit with Enron, if they did not sold the shares then they only got losses. Because the you only win or lose money when you sell your shares (not counting dividends if any). UK law: "You’ll…

" is how accounting works,"

There is no one accounting standard that is the ultimate reality. Accounting is a means of representing reality for a particular purpose like any other model. And it can only change and attempt to improve with the understanding that an outside reality exists.

And "mark to market" is a thing that exists, and is sometimes required, anyway.

So I think you're completely wrong in a deep sense, but also in a shallow technical sense.

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

#338

Post by perl4ever »

SilasX wrote: post #249
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. Do they? That's kind of a big assumption here. If the virus is going to have a major negative effect on their ability to deliver value, then that means they aren't (currently) sound businesses, and the market is correctly marking down their value. There could definitely be fiscal -- and epidemiological! -- measures that can reverse thi…

"then that means they aren't (currently) sound businesses, and the market is correctly marking down their value."

There is definitely an unsound premise here - the market hasn't marked down public companies as if they are generally unsound...yet. All the "crash" so far has done is take us back to the levels of 3-4 years ago.

Your point about buying bonds not changing "fundamental soundness" is like saying keeping someone from dying of an acute condition doesn't cure their illness. It still keeps them from dying right now! What is the advantage of causing a preventable catastrophe, just because everything eventually ends?

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

#339

Post by perl4ever »

edanm wrote: post #291
rtpg wrote: post #113

Earlier quoted context omitted.

I mean it’s just digits in a database. Price discovery sounds useful until you realize that the important thing is to just make enough food and meds for everyone, and the rest are mostly details.

That is asbolutely wrong. Price discovery is the thing that tells people to make food . It is the thing that tells people to make meds . It's also the thing that tells people to continue making and doing things that people need and aren't meds and food - like keep cleaning the streets, keep up basic sanitation, continue making the electricity run, etc.

I agree generally with what you say, but I think that the fed is not threatening price discovery but addressing a huge danger to it, which is an abnormal demand for credit. At all times there needs to be a certain amount of credit for people and business to function and in a crisis, demand suddenly spikes.

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

#340

Post by SilasX »

perl4ever wrote: post #338
SilasX wrote: post #249

Earlier quoted context omitted.

>We are talking about companies which have plenty of assets and strong businesses. Do they? That's kind of a big assumption here. If the virus is going to have a major negative effect on their ability to deliver value, then that means they aren't (currently) sound businesses, and the market is correctly marking down their value. There could definitely be fiscal -- and epidemiological! -- measures that can reverse thi…

"then that means they aren't (currently) sound businesses, and the market is correctly marking down their value." There is definitely an unsound premise here - the market hasn't marked down public companies as if they are generally unsound...yet. All the "crash" so far has done is take us back to the levels of 3-4 years ago. Your point about buying bonds not changing "fundamental soundness" is like saying keeping som…

>There is definitely an unsound premise here - the market hasn't marked down public companies as if they are generally unsound...yet. All the "crash" so far has done is take us back to the levels of 3-4 years ago.

Yes, because maybe it hasn't accepted the gravity of what's going to happen to their ability to deliver value, or anticipates free money.

>Your point about buying bonds not changing "fundamental soundness" is like saying keeping someone from dying of an acute condition doesn't cure their illness. It still keeps them from dying right now! What is the advantage of causing a preventable catastrophe, just because everything eventually ends?

My point was that if they're not actually sound, then buying the bonds doesn't change that; it's just doing that weekend-at-bernie's thing. To the extent that the business can't deliver value, markets depend on such businesses shutting down, and subsidizing their bonds only delays.

Now, you'd be right that, if there's something fixable about them with collective action, then we should do that thing. But that would still obviate the need to subsidize their bonds, because it would revitalize market interest in them!

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