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.
The perverse incentive for firms is that the more accurately they structure their financials to be highly vulnerable to systemic risk, the more likely it will be that the decision to do so will be rewarded by policymakers.
Simply put, capitalism isn't capitalism without firm failure and an very clear winners and losers when unexpected events occur. The US economy, which people think is capitalism, is nearly as nationalized and intertwined with government capital as China's economy.
In my view, if we're not going to have capitalism, then we should have a system that is significantly more fair and generous to those in need. If average peoples' life savings are at risk, so too should be banker and executive bonuses (and even jobs).
One can only imagine how much stronger the US economy would be today if the 2008 crisis had led to the smart decision makers being rewarded and the stupid ones being bankrupt. Instead, we had the opposite situation, where the stupid investors got bailed out and the smart ones had their well deserve gains slashed by government policy.
maybe govts are looking at their economies not just as systems of production but literally matters of national security, i.e if an economy looses its largest producers of certain products and industries, it looses a huge amount of economic leverage and hegemony... by bailing out companies temporarily they can be saved, and at least in theory recover faster without becoming vulnerable in the short term
letting companies that are over leveraged or inefficient die may be more “capitalist” (and lead to stronger economy long term) but practically speaking it would most likely be unacceptable damage to a sovereign nation like the u.s
just imagine the u.s without general motors or chrysler or ford for example...
(just to note, i’m not qualified to opine on whether this is good policy, just stating my understanding)
From an economic perspective, we need to think about what our economy is "good at". Generally speaking, when there is demand for something, the economy successfully figures out how to supply it.
With bailouts, there is very little demand for the expertise needed to package and re-sell parts of failed companies to the highest bidder. If Ford had been allowed to fail, perhaps Tesla could have purchased crucial IP or hired entire teams.
The legacy of Henry Ford's entrepreneurship is not the Ford name, it's in the firm's unique business acumen and many years of experience creating excellence. If the larger business (effectively a holding company) called "Ford" fails, the sub-units still have significant value, and the world is better off if that value can be utilized by more capable managers in other firms.
The bailout of Ford effectively punished Tesla, punished consumers, and even punished employees, since their lot is largely a function of the wisdom of those formulating the strategy, something that Ford did poorly enough that it deserved to fail.
that’s a good point, and well taken
i guess the other side of it is, if it’s easy for people to find another job, and/or there is a sufficient safety net, then it’s also probably easier to “just let the companies die”... but i think our system is basically run by those with the money to direct resources in the other direction unfortunately....
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.
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.
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.
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?
This should be the job of the federal government, not private investors. At other times we've had better support for these functions of government; the current administration in the US is not so friendly to such silly things as disaster management agencies.
This doesn't seem like a huge public health issue, but it is.
Stopping the market slide gives the public health officials like Dr. Fauci a bit of breathing room. Continued stock market slides will cause politicians to panic and demand lifting of restrictions, even if they're the only thing helping right now.
Or .. and hear me out .. we can ignore the fucking stock market and move to address the public health emergency as our sole concern. The stock market right now is tens of thousands of market participants running around wearing flaming underpants on their heads.
The bond/credit market - yeah, that has consequences. The Fed is already intervening there.
We can. Can Trump? Is he capable of that for more than a week or two?
A panicked President worried about reelection makes bad choices.
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.
The market is demanding liquidity to be able to manuver an uncertain future; this has caused an effective collapse of the credit market due to demand. Much like there's no TP on the shelf, there's no credit on the shelf; the fed however can print a lot of money if it wants to which ironically enough, can then be invested to print TP. If everyone has cash in the bank account, they feel secure, and that in of itself will stop the stock market from collapsing further.
The way they avoid inflation is by providing loans at a rate under the rate of inflation; free money, but it has to be paid back and over a reasonable term. This will expand the amount of money in the economy for a time.
History will remember this as is a perfect storm; the medical industry has been a tremendous burden on government and employers backs in the form of an unscrupulous blackbox of spend. A couple million deaths especially of elderly patients is going to upend the medical industries cash cow and at the same time force a hard look at what the industry is doing to be prepared for pandemics like this one. 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?
The savings to pension plans alone...
Also, there is no situation so bad that it can't be made worse, and companies laying people off makes it worse. There are bills to pay and people still need to buy food.
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.
The purpose of the Fed policy is to make coporate bonds (and other lending/borrowing) more attractive.
1. Nobody would buy them.
2. Small biz doesn't have access to corporate paper markets, even in the best of times.
Specific direct aid is called fiscal policy, and would have to be enacted by Congress (or possibly to a limited extent by the executive): reduced taxes, direct payments or credits, loan guarantees, government spending, other economic policy.
The Fed's tools are monetary policy, and manipulate the overall money supply. That's a powerful, but limited, power.
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.
Here it looks like they are going down:
https://www.treasury.gov/resource-center/data-chart-center/i...
It wouldn't surprise me if the 80 year bond bubble popped this year, but I don't see that happening yet.
Have you looked at BBB bonds? A lot of companies have been downgraded because the conditions have changed so dramatically, driving yields up as well.
When do you think it will translate to treasury bonds crashing? I can't imagine them having 5 more years, but on the short term they can easily go to negative yields.
If we're gonna have socialism, let's have socialism for the poor and capitalism for the rich and not the other way around.
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 exogenous factors -- like a virus making their products ultra-low-demand -- then no, that's not a problem of lack of money.
There absolutely is a lack of liquidity, that's why you see all these stock sales.
To name just one example, lots of companies have been buying back stock on margin because of extremely cheap loans. That stock is now worth far less, the loans keep maturing, new loans are harder to get and more expensive. So how do you raise cash? Sell stock. The cycle continues.
How did we get there? Not being over-leveraged in times of cheap money is a competitive disadvantage.
> People aren’t going to stores, restaurants, and airlines because of SARS-CoV-2, not a lack of credit or money.
They are also not going to work in many cases, supply chains have been disrupted, production has been slowed. That's a lot of income that has either disappeared or been put into question. That income is supposed to turn into spending, that spending is supposed to be someone else's income. It's a vicious circle.
The problem isn't so much what people are doing now, but what they're (not) going to be doing months down the line, and the uncertainty surrounding that.
> Printing money isn’t going to create customers for businesses effected by this pandemic.
Pretty much every business is affected by this pandemic. Without injecting liquidity, a massive wave of bankruptcies is going to follow suit in short order and the whole economy is going to go tits up.
You can argue that liquidity shouldn't have been injected in the past years during "the greatest economy of all times", but that milk has been spilled.
Imagine what the economic impact of the virus alone would be if there weren't lockdown pleas all over the news, social media, even highway signs. It would be close to zero now, and if Spanish Flu teaches us anything it would be negligible even at the peak.
So, the government is killing the economy. Hence, the government is also trying to prop it up. I suspect it won't end well either way.