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Comment by brenden2 | Hacker News Reader

Keep 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 in order to inflate stock prices now so that the current president can get re-elected.

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> 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, have fallen below par despite only containing short-term high-quality bonds that would never default in any reasonably scenario. Repo markets are forcing mortgage providers to de-leverage positions (which will in turn lead to foreclosures) based on the fact that there's no liquidity for the collateral. International trade for basic and necessary goods in the supply chain has grinder to a halt because banks are no longer extending trade finance.

Whether you like it or not our economy is completely dependent on having a well-functioning "money market", where short-term bonds, notes, and IOUs from high-quality issuers are used interchangeably with cash. And it's been this way for at least 150 years. Once the money market stops functioning economic activity grinds to a halt.

At least in 2008, there was maybe some moral hazard argument against the Fed intervening. From 2001-2007 banks and other financial institutions were playing fast and loose with their risk. Maybe in 2008 it might have made sense to let banks stew in the financial crisis they created to teach them a lesson.

But in this crisis what would be the point? This is a pandemic that came out of nowhere, that nobody could have possibly been prepared for. "You guys should have really had a contingency plan for global quarantine" doesn't make sense. I'm not even that big a fan of the Fed, but if there's any time ever to print money to prop up the economy, it's in the middle of a literal global pandemic when the government can already borrow money at zero percent interest.

> would never default in any reasonable scenario

Our reality is about to stray pretty far from any reasonable scenario.

bill gates saw this coming in 2015 [1] and proposed many solutions so we could better prepare including assembling a medical reserve corps, simulated "germ games", and investments in medical R&D along with increased investment in 3rd world health infrastructure to stop the infections before they spread

also many asian countries were better prepared due to their exposure to mers/sars [2]. so there was a precedent and influential people calling for change

but investing health infrastructure is not the Fed's job, that is congress/government's job - AKA the job of corporations through lobbyists who have no incentive to do any type of preparation, just perpetuate the consumption cycle

the fed is just responding to an economic crisis by trying to bail water out of a sinking boat, but they don't have the power to actually rebuild/fix that boat

[1] https://www.ted.com/talks/bill_gates_the_next_outbreak_we_re...

[2] https://www.ft.com/content/e015e096-6532-11ea-a6cd-df28cc3c6...

“bill gates saw this coming in 2015“

Let’s not make Gates the hero here. Most people working on infectious diseases knew about these problems.

Most people in general. Every time ebola started in Africa, there were information campaigns. But as long as you don't touch and it doesn't mutate, nobody cared much for some poor uneducated africans.

Everybody just thought it won't happen during their life/term, like some big asteroid impact. Well, not anymore

Yes, you're right. The guys at the top collect all the benefit, and everyone at the bottom absorbs all the risk.

> 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.

No, it's not. There's literally no bid on some issues of commercial paper and MBS. Literally nobody is offering to buy these securities at any price.

And we're not even talking about speculative assets here. We're talking about things like 30-day collateralized notes from Microsoft. Do you really think the market is "pricing" that Microsoft is likely to go bankrupt in the next 30 days? Or is it more likely that there's a huge shortage of money relative to the liquidity demands imposed by the dislocations.

Despite their destructiveness in earlier decades, I'm willing to loan Microsoft cash for 30 days for double my money back. Where do I buy?

The Fed is also buying corporate bonds as of today: https://www.federalreserve.gov/newsevents/pressreleases/file...

Let's see how this is going to play out!

https://thesoundingline.com/do-not-allow-the-fed-to-buy-corp...

> Which companies will the Fed give free money to? Which companies will they allow to fail? How low should corporate borrowing costs be and for which companies? How much debt should they allow each company to carry? What if companies issue bonds to buyout competitors? What if a company defaults on the Fed? The Fed can’t answer any of these questions. That won’t stop them from showering America’s largest and most indebted companies with free cash

Look at the ECB they are buying stocks for quite some time now.

https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.h...

and BOJ https://www3.boj.or.jp/market/en/menu_etf.htm

The scale of BOJ's ETF purchases is quite something.

A foreshadowing of all developed country central banks’ actions.

It’s only a matter of time before the Fed, BOE, and the ECB do so at similar scale.

Incredibly disappointing as an educated investor that you must be judicious about asset acquisitions and allocations, and yet central banks just make the money printer go brrrrr when they deem it necessary (something, somewhere is always “too big to fail”).

What would you prefer? 20% unemployment?

Anyway, central banks don't really do asset allocation -- they buy the least risky assets they can. Their real goal is to keep the currency from deflating.

Whoa there with the false equivalency. Helicopter money would be more helpful than propping up the wealth of the top wealth brackets using price floors through broad scale asset purchases. Literally give away hundreds of billions of dollars to citizens who will spend it right this minute. Have the government be economic demand of last resort to steady the ship until people can actually move about again. There will be no inflation to speak of due to how GDP has plummeted over the last few weeks.

Monetary velocity > asset price protection. The stock market isn’t the economy, people producing, consuming, and exchanging fiat in the process are.

What do you think helicopter money looks like? The Treasury borrows a bunch of money from the Fed, and then sends it out. The Fed ends up owning large amounts of Treasuries. The only difference is that the Fed isn't waiting for the Treasury. If the Treasury starts writing checks tomorrow, it's effectively helicopter money.

> The stock market isn’t the economy, people producing, consuming, and exchanging fiat in the process are.

You might get tarred-and-feathered if you keep speaking like that. Be careful ;)

Judge me by the enemies I’ve made.

This.

Can someone with some financial background refute this? Why is buying assets a better idea? In concrete, non-abstract, non-hand-wavey, laymen terms, how is it going to make the Average Joe get through this crisis? How is it going to help him pay for his rent/food/etc in the next 2-3 months, and potentially longer when he possibly will have no job?

Legally, the Fed can't do that. Only the government can. Anyway, the Fed is mostly buying government debt or government-guaranteed debt. By buying up the existing debt, this creates space for the government to borrow and spend on supporting Average Joe.

Alternatively, the Treasury could print money and mail it out to Average Joe. But then there's no way for the Fed take the money out of circulation if we get inflation.

I'd rather see the government become employer of last resort, than investor of last resort. With some kind of 30 hrs of work and 10 hrs of skills/education training. And a couple hours week of mental health/addiction services optionally. With some kind of medical and other benefits.

I believe the issue with the gov being the employer of last resort is that you end-up with a fat, inefficient government. What politician will dare to fire all the redundant workers once that crisis is over? You can see this issue in ex-communist states.

https://en.wikipedia.org/wiki/New_Deal

We’ve done it before, and it worked. So much so that they instituted presidential term limits, as FDR served four terms he was so popular.

Why fire people? wouldn't companies be able to lure workers away from the government with better pay and benefits? The government could offer some kind of incentive to companies where the government pays the person for some length of time and they work for a private company for free as long as the companies keeps that person on for 1 year or something like that.

That doesn't really happen in the real world. People are reluctant to change jobs. Especially if they need to support families. They would rather vote for the guy who promises them higher wages and fat pensions rather than to vote for the guy who promises incentives to work (again) in the private sector(and then risk the insecurity being fired<again>). Once you hire in the public sector is really hard to get rid of them.

I find it funny that while I am actual economist, whenever I comment on my actual area of expertise, I get voted down. Random topics where I know nothing, I get upvoted. Actual expertise, voted down.

"The SNB (Swiss Nation bank) is the 35th largest investor, on average, across its top 50 holdings. In most securities, the only firms with larger investments are big asset managers like Blackrock and Vanguard, which hold investments for many individuals and institutions. That means that the SNB is the largest individual fund, bigger than any hedge fund." [1]

[1] https://qz.com/1140322/check-out-the-swiss-central-banks-ins...

> Keep in mind they're only able to buy US treasuries and mortgage backed securities.

They announced they will buy municiple bonds also.

https://www.cnbc.com/2020/03/20/the-federal-reserve-is-expan...

> If Congress changes the rules to allow the Fed to purchase stocks

Corporate bonds first. If that fails, then stocks. Baby steps.

Why didn’t congress have to approve the munis?

They’re government securities.

They're already buying corporate bonds: https://www.federalreserve.gov/newsevents/pressreleases/file...

> Keep in mind they're only able to buy US treasuries and mortgage backed securities.

It's those MBS that were the real problem. Total panic on Wall Street with those, because everyone is so heavily tied into them and with all these unemployed people, foreclosures are going go through the roof.

Now that they can offload them to the Fed instead of trying to sell them for pennies on the dollar, it's all champagne and caviar back on Wall Street.

These are agency MBS, which are already backed by the US government, so Wall Street was already pre-bailed-out on them. They already had that champagne and caviar.

There's already a 2 month freeze on foreclosures. If they give checks to Americans, it'll go to mortgages most likely.

This is absolutely bonkers territory. 10,000 years from now, I wouldn't be surprised if archeologists find money between the rock layers.

We already have zombie companies with 10 years of 0 rates.

This was exposing that.

Once you start with this shit, you never get out of it. The market starts pricing it in, and if you ever try to back off, asset prices fall, and that's the end of the world to the 0.001%.

See us with 0% rates since 2008. See Europe with negative rates since 2012. See Japan since 1989.

We will have a zombie economy if this happens, just like Japan.

it's not so our current president can get re-elected (Fed is largely independent of executive branch) but to prevent massive riots, social unrest, and ultimately a large amount of human suffering now at the cost of pushing it down the road

Agreed, these actions are to prop up the existing economic system.

It's my opinion our economic system needs a major overhaul, one that is preppered to address real situations like this without setting unrealistic growth expectations across the board and better stabilizing the majority of the workforce/labor market.

This national economic stress businesses are feeling is quite similar to the stresses a large portion of the US workforce/families feel every single day/week in respect to future financial stability, risk valuation, growth, etc. It's about to get even worse for most Americans and may strain mass acceptance economic policy and acceptance of our system. That questioning of the system may be a good thing.

I don't think a knee jerk correction where many are hungry, suffering, rioting, without healthcare, etc. is the way about correcting these problems to be clear.

It doesn't seem like the issuees we're seeing will gradually self-correct (concentrated wealth, increased wealth inequality, massive barriers to entry in markets, declining workforce/labor economic growth, ever consolidated market share to fewer big businesses...)

Perhaps this is the invisible all-knowing hand of the market self-correcting?

American Gosplan.

> or valuations soar beyond

Can you explain why you think Fed purchases would cause stock market soar instead of decline to slow down a little?

It is expected that they change their mandate and start buying corporate bonds directly

https://thesoundingline.com/do-not-allow-the-fed-to-buy-corp...

Regarding the zombie companies. A high stock price wouldn’t keep a company from going bankrupt. They could try to do a capital raise but that’s going to raise a lot of eyebrows if the fed is buying your newly released stock. I’d be curious how that works.

"Fed to lend against stocks and bonds in bid to stabilize markets"

https://www.ft.com/content/cf485398-689d-11ea-800d-da70cff6e...

From the article: "The Fed will be moving for the first time into corporate bonds, purchasing the investment-grade securities in primary and secondary markets and through exchange-traded funds."

Wouldn't this mean that FED, which already has the control over the money supply, can now go and buy companies with the money it creates ?

If you define FED as a private entity - this sounds like theft.

If you define it as a part of the government then you are transitioning to socialism (government ownership of means of production).

Neither of these sounds like something that would be acceptable in the US political system - am I missing something here ?

It's not socialism if the poor unwashed people don't get anything for free. /s

The Fed doesn't control the money supply. That's the job of the Treasury.

By controlling the amount of loans made to banks, the Fed controls the money supply. Money is created out of thin air (without a printing press) by issuing new loans, which is what the Fed does.

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