Why Stock Buybacks Are Dangerous for the Economy
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Re: Why Stock Buybacks Are Dangerous for the Economy
#2Corporate buybacks are dangerous when when the taxpayer bails out the shareholders.
Major companies loaded up on debt because a decade of low interest rates made it cheap to do so, then purchased stock because shareholders wanted them to (paper gain and get taxed later on sale, so more flexibility for taxation timing).
So companies have no wiggle room in a crisis. So what? Bankruptcy, hose the shareholders, sell the assets to a new company, and the market will learn. But no - bailouts for everyone! The Fed buys their old junk bonds and even new ones! No one ever feels any pain. The government isn’t allowing natural business processes to happen and then some dumb idea like “ban stock buybacks! That will solve everything!” is promoted.
The government has trained the market so that if a recession happens, it will backstop everything. It’s ridiculous.
Re: Why Stock Buybacks Are Dangerous for the Economy
#3Yawn. If you look at why companies like Apple use debt for buybacks, it’s because the US corporate tax system traps earnings overseas. Sure the Trump tax cuts made things slightly better, but returning foreign profits still cedes about half of them to the tax man.
Buybacks are just dividends with a more tax efficient method of distribution.
I still don’t understand why we tax savings and investment, which is what corporate income taxes do. Make the corporate rate zero, and compensate by raising capital gains and dividend tax rates to individual income rates. That rewards reinvesting into American production and pulls back all those foreign profits.
Re: Why Stock Buybacks Are Dangerous for the Economy
#4Corporate buybacks are dangerous when when the taxpayer bails out the shareholders . Major companies loaded up on debt because a decade of low interest rates made it cheap to do so, then purchased stock because shareholders wanted them to (paper gain and get taxed later on sale, so more flexibility for taxation timing). So companies have no wiggle room in a crisis. So what? Bankruptcy, hose the shareholders, sell the…
Yeah, stock buybacks aren't really problematic as a mechanism. The root problem is ZIRP, which pushes companies to take on as much debt as possible. It leaves companies without a reserve to weather changing conditions, and debt that needs to be rigidly serviced on a model from the past.
I too wish that overleveraged companies wouldn't get bailed out when the house of cards comes tumbling down every decade, but I don't see how that's prudent or politically palatable. It's a spiteful desire that comes from being told that nothing can be done to reign in the bad behavior during the good times, while bogus inflation metrics are used to keep the party going.
Interest rates need to go up and stay there, as they haven't been allowed to do for the past few decades. Of course that is problematic as the mound of existing debt becomes more expensive. Which is why these conditions form a spiral that will end up destroying the dollar. But given USD's status as reserve currency, I don't know how to time this.
Re: Why Stock Buybacks Are Dangerous for the Economy
#5Corporate buybacks are dangerous when when the taxpayer bails out the shareholders . Major companies loaded up on debt because a decade of low interest rates made it cheap to do so, then purchased stock because shareholders wanted them to (paper gain and get taxed later on sale, so more flexibility for taxation timing). So companies have no wiggle room in a crisis. So what? Bankruptcy, hose the shareholders, sell the…
In addition to all of this, part of the reason that the cost of debt has been so low to begin with is because this implicit backstop compresses credit spreads (a measure of the riskiness of corporate debt). If it weren't for the assumption that the government would bail out shareholders, companies would have had less debt and more equity, and the bailouts might not have been necessary to begin with. (Buybacks are just the mechanism by which corporations increase their debt to equity ratio).
I wouldn't go so far as to liquidate the assets. (That's probably not what would happen in the absence of government intervention - creditors would likely recoup more through a restructuring than a liquidation). But the equity needs to be wiped. Full stop. If you own shares in US passenger airlines (as I do, through index funds), those shares should now be worthless.
Re: Why Stock Buybacks Are Dangerous for the Economy
#6Yawn. If you look at why companies like Apple use debt for buybacks, it’s because the US corporate tax system traps earnings overseas. Sure the Trump tax cuts made things slightly better, but returning foreign profits still cedes about half of them to the tax man. Buybacks are just dividends with a more tax efficient method of distribution. I still don’t understand why we tax savings and investment, which is what cor…
Completely agree - the corporate tax rate should be way lower, ideally zero. The money is eventually taxed in dividends, employee pay, or when stock is sold. They also pay property tax, and consumption taxes.
Why don't companies have war chests of cash? Because they're taxed on it, better to give it to employees, reinvest in projects, etc.
Re: Why Stock Buybacks Are Dangerous for the Economy
#7The best excuse for buybacks are that they are "tax efficient" which is another way of saying they are about tax evasion. I don't care how you feel about tax rates, if you think corporations should pay less taxes lower the rates. We just did that in the US.
Less legitimate (but I would argue as common) reasons are to prevent excessive dilution from stock compensation plans and to prop up the value of shares tied to compensation packages. Studies show that companies buy shares when the price is high, so I doubt on the whole shareholders benefit. It feels good to see a stock go up, but dividends are nice too.
Re: Why Stock Buybacks Are Dangerous for the Economy
#8The best excuse for buybacks are that they are "tax efficient" which is another way of saying they are about tax evasion. I don't care how you feel about tax rates, if you think corporations should pay less taxes lower the rates. We just did that in the US. Less legitimate (but I would argue as common) reasons are to prevent excessive dilution from stock compensation plans and to prop up the value of shares tied to c…
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Re: Why Stock Buybacks Are Dangerous for the Economy
#9Corporate buybacks are dangerous when when the taxpayer bails out the shareholders . Major companies loaded up on debt because a decade of low interest rates made it cheap to do so, then purchased stock because shareholders wanted them to (paper gain and get taxed later on sale, so more flexibility for taxation timing). So companies have no wiggle room in a crisis. So what? Bankruptcy, hose the shareholders, sell the…
Yeah, stock buybacks aren't really problematic as a mechanism. The root problem is ZIRP, which pushes companies to take on as much debt as possible. It leaves companies without a reserve to weather changing conditions, and debt that needs to be rigidly serviced on a model from the past. I too wish that overleveraged companies wouldn't get bailed out when the house of cards comes tumbling down every decade, but I don'…
> but I don't see how that's prudent or politically palatable.
It is prudent because it prevents this moral hazard that reduces efficiency and increases systemic risks. Yes, there will be short term turmoil as companies and their operations are restructured. But it is a long-term imperative. Companies must be allowed to die.
It is politically palatable because rich capitalists are getting bailed out with an unlimited backstop while mom n' pop got a measly $1200 one-off payment.
Re: Why Stock Buybacks Are Dangerous for the Economy
#10Earlier quoted context omitted.
Yeah, stock buybacks aren't really problematic as a mechanism. The root problem is ZIRP, which pushes companies to take on as much debt as possible. It leaves companies without a reserve to weather changing conditions, and debt that needs to be rigidly serviced on a model from the past. I too wish that overleveraged companies wouldn't get bailed out when the house of cards comes tumbling down every decade, but I don'…
> but I don't see how that's prudent or politically palatable. It is prudent because it prevents this moral hazard that reduces efficiency and increases systemic risks. Yes, there will be short term turmoil as companies and their operations are restructured. But it is a long-term imperative. Companies must be allowed to die. It is politically palatable because rich capitalists are getting bailed out with an unlimited…
I agree with where you're coming from, and I don't really want to be arguing against just deserts of bankruptcies.
I'm just saying that looking at the big picture, choosing the catastrophic option is not productive. And so it will never have political buy in (politics is driven by business, not voters), even from businesses that don't need a bailout.
Letting bad behavior continue to occur for long stretches with the idea that there's going to be some eventual reckoning just isn't realistic. Fundamentally, even if a bunch of companies do go bankrupt, the executive compensation won't be clawed back - so the looters still make out. Rather, the bad practices need to be reigned in when they're occurring. And those bad practices run far deeper than the simple technique of stock buybacks.