March 23, 2020 was a critical day in U.S. history, though at the time it felt like another 24 hours on the road to pandemic apocalypse. Over 47,000 Americans had contracted the coronavirus by official count, and hundreds of thousands more were walking around with it undiagnosed. Deaths were just starting to spike. Historic job losses had commenced, as lockdowns cascaded across America with no end in sight. The stock market closed more than 35 percent off its peak, continuing an epic slide that had started a month earlier.
But two actions on March 23 would swing investors from despair to relief, and reveal who really matters in America.
That morning, the Federal Reserve announced the deployment of additional “tools to support households, businesses, and the U.S. economy overall in this challenging time.” The measures included many actions taken during the 2008 financial crisis, with one new wrinkle: Direct purchases of corporate debt — the first nongovernment bond-buying in the Fed’s history — would now be allowed. Companies have swelled their borrowing in recent years, and experts have identified this as a source of serious economic risk. A sudden shock like the pandemic that wiped out revenues would not only cause bankruptcies, but also accelerate bond defaults, broadening stress throughout the financial system.
Backstopping corporate bond markets would support investors and capital owners. By the evening of March 23, investor confidence was lifted even further; reports announced progress on a record $2.2 trillion congressional rescue package, a large chunk of which would go to support the Fed’s interventions in corporate bond and other markets.
What would become known as the CARES Act became law on March 27, and the investor class has never looked back. While Americans struggle to file unemployment claims and extract stimulus checks from their banks, while small businesses face extinction amid a meager and under-baked federal grant program, the Fed has, at least temporarily, propped up every equity and credit market in America. And in a testament to its strength, it did so without spending a single cent.
The mere announcement of future spending heartened investors, who have relied on Fed support since the last financial crisis. This explains the shocking dissonance between collapsing economic conditions and the relative comfort on Wall Street. Between March 23 and April 30, the Dow Jones Industrial Average rocketed nearly 6,000 points, a jump of nearly 31 percent, creating over $7 trillion in capital wealth. The April gains were the biggest in one month since 1987.
The same month, 20.5 million Americans lost their jobs.
Similarly, the Fed’s promises to purchase corporate and municipal bonds and asset-backed securities and really anything else uplifted credit markets and made corporate borrowing cheaper, a tangible subsidy for large companies. March ended up setting a record for issuance of investment-grade corporate debt — the safest kind of corporate debt. Two hundred and sixty eight billion dollars traded hands that month, according to a Moody’s Analytics study, and April surpassed it, at $296 billion. Overall, $1 trillion in investment-grade bonds have been issued this year, nearly as much as all of 2019, along with tens of billions more in junk bonds from risky companies, which the Fed has also signaled that it would purchase.
Dozens of companies, from troubled aircraft maker Boeing to airline Delta, from Exxon Mobil to T-Mobile, have been tapping credit markets they might never have been able to access, at lower rates than previously offered. The American Prospect and The Intercept have identified at least 49 large companies that have issued corporate bonds since the Federal Reserve announced that it would purchase them. For some, the benefit of cheaper borrowing was worth hundreds of millions of dollars.
“It is meaningfully changing the way investors are evaluating the risks for a swath of companies,” said Kathryn Judge, a law professor at Columbia University and expert in financial markets and regulations. The Fed’s support disproportionately flows to large corporations with access to credit markets, Joyce pointed out. “Small and midsized businesses with much more need are more likely to struggle.”
Unlike in 2008, the large corporate entities in line for a bailout didn’t create the crisis in the first place. The Fed’s actions to save corporations from instant bankruptcy, simply by nodding in their direction, beats the alternative. The problem is that this same level of thunderous rescue hasn’t been extended beyond the biggest firms, which could lead to an economic landscape where they dominate society in the very near future. We have a system for central bankers to throw a life preserver to any large corporation, while everyone else must swim several miles to shore themselves.
Congress made the choice to empower the Fed, rather than figure out how to adequately support the rest of the economy and its citizens. And it gave the central bank wide discretion over the process, absolving members of Congress from blame but introducing the Fed’s bias toward large corporations and banks into who gets saved and who doesn’t.
In short, while activists nitpicked about which companies got small business grants worth $10 million, the real bailout, with trillions on the line rather than millions, was happening, quietly, at the Fed.
Investors are supposed to be risk-takers, who earn outsized returns because they put their money on the line. The Fed’s extraordinary support completely flips that, giving a safety net to those who don’t need it and making a mockery of the alleged virtues of free-market capitalism. If nothing the wealthy ventures can be lost, the only people who bear risks in our society are those who don’t have any money to begin with. That’s a recipe for soaring sales in pitchforks.
But what the Fed is doing may not even be sufficient to protect capital. The week of May 11 saw the biggest percentage drop in the stock market in nearly two months. As the Fed actually starts to actually outlay money, even it recognizes that not every crisis can necessarily be solved by lending gobs of money to General Electric. Not only is it socially unsustainable to protect just the rich from a crisis of this magnitude, it may not even work.
But two actions on March 23 would swing investors from despair to relief, and reveal who really matters in America.
That morning, the Federal Reserve announced the deployment of additional “tools to support households, businesses, and the U.S. economy overall in this challenging time.” The measures included many actions taken during the 2008 financial crisis, with one new wrinkle: Direct purchases of corporate debt — the first nongovernment bond-buying in the Fed’s history — would now be allowed. Companies have swelled their borrowing in recent years, and experts have identified this as a source of serious economic risk. A sudden shock like the pandemic that wiped out revenues would not only cause bankruptcies, but also accelerate bond defaults, broadening stress throughout the financial system.
Backstopping corporate bond markets would support investors and capital owners. By the evening of March 23, investor confidence was lifted even further; reports announced progress on a record $2.2 trillion congressional rescue package, a large chunk of which would go to support the Fed’s interventions in corporate bond and other markets.What would become known as the CARES Act became law on March 27, and the investor class has never looked back. While Americans struggle to file unemployment claims and extract stimulus checks from their banks, while small businesses face extinction amid a meager and under-baked federal grant program, the Fed has, at least temporarily, propped up every equity and credit market in America. And in a testament to its strength, it did so without spending a single cent.
The mere announcement of future spending heartened investors, who have relied on Fed support since the last financial crisis. This explains the shocking dissonance between collapsing economic conditions and the relative comfort on Wall Street. Between March 23 and April 30, the Dow Jones Industrial Average rocketed nearly 6,000 points, a jump of nearly 31 percent, creating over $7 trillion in capital wealth. The April gains were the biggest in one month since 1987.
The same month, 20.5 million Americans lost their jobs.
Similarly, the Fed’s promises to purchase corporate and municipal bonds and asset-backed securities and really anything else uplifted credit markets and made corporate borrowing cheaper, a tangible subsidy for large companies. March ended up setting a record for issuance of investment-grade corporate debt — the safest kind of corporate debt. Two hundred and sixty eight billion dollars traded hands that month, according to a Moody’s Analytics study, and April surpassed it, at $296 billion. Overall, $1 trillion in investment-grade bonds have been issued this year, nearly as much as all of 2019, along with tens of billions more in junk bonds from risky companies, which the Fed has also signaled that it would purchase.
Dozens of companies, from troubled aircraft maker Boeing to airline Delta, from Exxon Mobil to T-Mobile, have been tapping credit markets they might never have been able to access, at lower rates than previously offered. The American Prospect and The Intercept have identified at least 49 large companies that have issued corporate bonds since the Federal Reserve announced that it would purchase them. For some, the benefit of cheaper borrowing was worth hundreds of millions of dollars.
“It is meaningfully changing the way investors are evaluating the risks for a swath of companies,” said Kathryn Judge, a law professor at Columbia University and expert in financial markets and regulations. The Fed’s support disproportionately flows to large corporations with access to credit markets, Joyce pointed out. “Small and midsized businesses with much more need are more likely to struggle.”
Unlike in 2008, the large corporate entities in line for a bailout didn’t create the crisis in the first place. The Fed’s actions to save corporations from instant bankruptcy, simply by nodding in their direction, beats the alternative. The problem is that this same level of thunderous rescue hasn’t been extended beyond the biggest firms, which could lead to an economic landscape where they dominate society in the very near future. We have a system for central bankers to throw a life preserver to any large corporation, while everyone else must swim several miles to shore themselves.
Congress made the choice to empower the Fed, rather than figure out how to adequately support the rest of the economy and its citizens. And it gave the central bank wide discretion over the process, absolving members of Congress from blame but introducing the Fed’s bias toward large corporations and banks into who gets saved and who doesn’t.
In short, while activists nitpicked about which companies got small business grants worth $10 million, the real bailout, with trillions on the line rather than millions, was happening, quietly, at the Fed.
Investors are supposed to be risk-takers, who earn outsized returns because they put their money on the line. The Fed’s extraordinary support completely flips that, giving a safety net to those who don’t need it and making a mockery of the alleged virtues of free-market capitalism. If nothing the wealthy ventures can be lost, the only people who bear risks in our society are those who don’t have any money to begin with. That’s a recipe for soaring sales in pitchforks.
But what the Fed is doing may not even be sufficient to protect capital. The week of May 11 saw the biggest percentage drop in the stock market in nearly two months. As the Fed actually starts to actually outlay money, even it recognizes that not every crisis can necessarily be solved by lending gobs of money to General Electric. Not only is it socially unsustainable to protect just the rich from a crisis of this magnitude, it may not even work.
by David Dayen, The Intercept | Read more:
Image: Soohee Cho/The Intercept, Getty Images
