Notwithstanding the relatively small amount purchased, the question remains still: is this something the federal reserve should be engaged in in the first place? And what are the long term consequences of even the perception of such behavior?
Of course, that's not the only alternative. But as far as injecting liquidity into the economy, I'd rather see the government having agency into deciding where to inject it rather than letting for-profit companies who don't have the best interests of the economy at heart do it on its behalf. Same should have happened for the covid helicopter money: letting banks allocate public funds was a mistake. Public funds, public decisions.
It's also not a scaling function (reduce everyone's cost of borrowing by 10%, say). There's a floor so you get a clipping effect.
The Fed's intervention is like the CD mastering Loudness Wars.
But the point of this subthread remains; corporate loans are expected to be paid back (less some loss reserve, but plus some credit spread), whilst direct payments to individuals are not.
[Edit: should speak of corporate bonds, not loans, for precision. There is a big difference though for this thread it's minor.]
Sure, then we don't need to finance their debt.
Equity is equity and debt is debt. The two things are different and serve different purposes. There is no reason to take equity in a company when all the company wants is a loan.
In normal times with well-functioning markets and non-distressed players, that's so.
But with distressed (or small or less creditworthy) players or at distressed times, it's extremely common for lenders to demand equity as a concession for making a loan. See PIKs, warrant coverage, convertible notes, etc.
That was facing a situation with no bids on many issuances from AAA to C rated CUSIPs.
And true, you don't negotiate the price of a can of Coke, but if people stopped buying Coke in masses, stores would be incentivized to lower their prices just so it can clear the shelves…
~46% of the IG market is rated BBB (which was the situation before the covid19 btw), where the overall market is trading over par by about 14% on average spells doom for anyone buying the IG market now and holding to maturity… unless you can sell at higher prices to the greater fool: FRBNY leveraging future tax payer money from the treasury lol
The situation is even worse with WMT senior unsecureds[0]: you have walmart paper coming due in 2040 trading at +150 that yields 5.625 from par (100), whose gonna wanna get in and hold those bags now to maturity? Nobody but FRBNY leveraging future tax payer money from the treasury lol
On the other hand this is a unique situation where the economic downturn is being explicitly forced by governments.
Companies failing is important, and companies acting in ways in which they try not to fail is important, and all of this protection from failure puts companies who try to be conservative and responsible in their finances preparing to survive bad times are at a significant disadvantage.
And with all of this money being injected into the economy, we are absolutely going to get an enormous amount of inflation... eventually. You could see it as already happening with the valuation of the stock market. Markets usually lag consumer prices in inflationary periods, but it looks like this unique situation will be in reverse.
I think these are the first steps towards post-scarcity economies where money becomes vastly less important, but the road there will be extremely rocky, I wouldn't be surprised by global famines and world wars before it's all sorted out.
Short term though, many of these actions are extremely necessary to prevent a serious depression. What happens when you prevent a global depression by everybody injecting lots of new money into the various global economies is sort of an unknown, if everybody devalues their currency the same then it's not like everybody's currency can be devauled against everybody else's.
But if basically none of the money is making it into the hands of the average person, will we actually see inflation of anything except stock prices (and probably also luxury goods that are being bought by people who receive most of their income from capital gains)?
There was supposed to be inflation due to QE as well, but interest rates have been low for over a decade and we've barely seen any inflation. Maybe it's because the average person isn't seeing any of it, and the small portion of people who are will only consume so much. Most of it ends up getting shoveled right back into assets.
a) Zombie companies that should be dead but are propped up by taxpayer money/gov policy
> This crisis is expected to be severe but short, lowering the risk of propping up inefficient "zombie" firms that should be allowed to fail. That may not be the case next time around.
b) Moral hazards, where bad companies aren't punished for risk taking or immoral behaviour.
> Plus, there are fears that an ongoing commitment to corporate bond purchases could create a so-called "moral hazard," encouraging companies to borrow more from less-selective lenders on the expectation that Fed intervention would limit risks.
Market corrections are an opportunity to clean up a lot of cruft. But COVID isn't a typical correction, it's more of a pause button, until it can resume.
I've noticed a trend where more and more politicians act like defenders of jobs or protectors of dying companies. That sort of thing is a minefield for governments. Those resources would be far better spent helping growing/successful companies grow by getting out of the way + giving social safety nets to regular people. Not corporate welfare to politically connected franken companies.
That sort of political help to zombies is more common here in Canada (see: the SNC Lavalin fiasco) and is rampant in the even more hyper-protective countries like Japan and Germany - places where big successful companies are less common so they have deeper ties to politicians/communities, who keep them on life support.
The FED’s chartered goals are “maximum employment, stable prices, and moderate long-term interest rates.” For decades, economists have been dubious about maximum employment being a useful or productive goal for monetary policy, but it remains a goal nonetheless. Even though they aren’t bailing out Wal-Mart with this deal, you could argue that even if they were, the employment clause of their charter would justify it.
However, after some digging, it looks like it's not simply some indirect purchase via ETF, judging from articles like this one:
https://hardnoxandfriends.com/2020/06/29/federal-reserve-to-...
>To avoid criticism that it might favor a specific industry, the Fed said two weeks ago that it would seek to mimic a broad market index approach and purchase bonds from a wide range of companies. ...
>The Fed said Sunday that it made its first bond buys from 86 companies last week. Those companies include Nike, broadcaster Fox Corp. ...
>The central bank is also purchasing pools of bonds in exchange-traded funds, which operate similarly to mutual funds. The Fed currently owns $6.8 billion of bond ETFs.
So this is on top of the previous ETF purchases.
[1] which, for the record, is still worrying! Just not as bad as if they bought the corporate bonds directly, which they seem to be doing now.
With the amount of gaslighting and misinformation being spread by people ranging from useful idiots to straight out antisemitittes and disintegrationists I think the behaviour of the federal reserve is not the biggest problem here and I would suggest you educate yourself to understand the problem before falling for some ragebate.
No debt is being forgiven, similar practices are being taken all over the world, in Germany their concern was that they could not do this fast enough to keep the economy from collapsing.
https://www.reuters.com/article/us-health-coronavirus-banks-...
> “Flooding the market with money is not enough. You need the credit demand, and you can only have credit demand if you can hand out the money,” she said.