If your competitors are all borrowing money at low interest, you do the same or you're not competitive.

The problem is we lowered interest rates in response to the housing crisis and then left them there. Because doing so inflated (really reinflated) such a ginormous credit bubble that it would take more than an entire market cycle for real economic growth to catch up to it, and (absent printing money) you can only raise interest rates to the extent that borrowing demand from real economic growth exceeds the reduction in credit caused by the higher interest rates, or you cause deflation and an economic downturn.

This is also why the rate of inflation has been below historic norms since the housing crisis -- reduced to that level just by raising rates the tiny bit that they did. And now even that's gone and interest rates are at zero.

This is what the fallout of long-term low interest rates looks like. The only way out of it within our lifetimes would be mass defaults (which would cause a depression) or enough inflation to devalue the outstanding debts.

Considering that we're also now facing deflationary forces from these quarantines, maybe it's time to start printing some money. Certainly countering the deflation by encouraging even more borrowing would just be trying to dig our way out of a hole.

I'm gonna go with:

0) A pandemic has caused the government to shut down a double-digit percentage of the economy.

You need to have enough saved to survive 6 months w/o income is preached a lot in personal finance and somehow this is not practiced for businesses.It is understandable that cash-strapped startups can't afford to do this but the companies buying back shares to increase their stock price certainly could.

When times are good, these companies divvy up the profits to give large bonuses.

When times are bad, they divvy up the bailout money to give smaller bonuses.

It certainly seems like there is no connection between compensation and performance once you are too big to fail.

And there is a very convenient "heads I win, tails you lose" structure in favor of the large companies.

Uncertainty and desire to cash out alone was enough. The stock market is based on opinions and emotion.

But even if they were banned, these companies wouldn't just have piles of cash reserves sitting around. To remain competitive, they would've had it invested in resources like additional personnel that would've gotten the axe either way when the belt has to be tightened.

There needs to be better financial planning and regulations - a lot of them.

But the best thing that could've helped here is better planning for national emergencies like a pandemic. Bill Gates and others have been clamoring for a long time about these dangers and we should've taken them more seriously.

People who invested in index funds fared better than hedge funds. And there was no real price discovery thanks to Fed put; even many small hedge funds closed their shops when they couldn't beat ETFs based on indices like SPY, VOO, QQQ, etc.

Now both bonds and stocks are crashing, as the commercial paper becomes junk.

The core of the current financial crisis is that demand has evaporated over the course of a week or two and / or businesses can't operate; both due to COVID-19. As a result many small business won't survive. By extension many people are impacted, won't make rent, won't make lease payments, won't make credit card payments.

The stock market dropping is reflecting the above reality unwinding. And yes prices were inflated, and still are (QE is trying to hold them, we'll see how long that lasts...).

Unlike the 2008 crises that had synthetic derivatives, and shitty rating agencies to blame - this isn't the case here.

Though don't get me wrong I still think there are many sketchy things that go on, and many people who need to answer for them. Let's starts with the politicians that sold their shares given insider information, followed by others who curry favor with wall st.

Not only that, but they also use borrowed money with corporate debt to buy back stocks.

https://www.bloomberg.com/news/articles/2019-08-08/companies...

Companies dropping 50% because they miss 3 months of revenue?

I suspect this is a 12-24 month economic event, maybe longer before it fully rolls through.

Will. Never. Happen.

Banks committed outright fraud in 2009, by the dozens, by the hundreds. Thousands of people should have gone to jail. Not a single. Goddamn. One. Did.

Generally speaking, Boeing and others should not be bailed out. Capital should flow to the small businesses to keep their doors open, their people employed.

I'd also argue strongly against bailing out companies that shifted their work overseas. There needs to be a price to their actions. This is a just price IMO.

The stock market is reflecting that the damage this will do on the economy is real, and currently unknown but expected to be pretty bad.

So in this case, the cash ends up with the stock owner, isn't it? What are the differences between cash in the hand of company vs cash in the hand of stock owners?

Black swan events are unpredictable and outside of what is normally expected.

There were also 3 other localized outbreaks (SARS in 2003, Swine Flu in 2009, MERS in 2012) so that to me sounds like we were 3 viral mutations away from this being the 4th global pandemic in 20 years.

If we're structuring business and our economies such that they fall over or require ~1 trillion dollars for bailouts, every 4-7 years on average, then something is vastly, massively, completely, extremely wrong with our approach.

I don't care how many economics nobel prizes are racked up by theorists; or about efficient market theory and blah blah blah. These systems are failing in the real world and that's the only existence proof needed.

Running a just-in-time razor-thin-margins all-profits-reinvested-no-savings business is great in theory but apparently the wind blowing from the wrong direction destroys it all. It has the feeling of the economics/finance version of a physicist assuming a spherical car in a perfect vacuum with a point source of gravity when designing a system that has to survive actual usage.

Those who prepare well (3-6 months of reserves) will be ok, other businesses will need to perish to teach others a lesson.

You are literally advocating "Privatize the gains, socialize the losses", no?

'It's ok that the (public) government bails them out, because the (private) companies made even more money'

A recession is not.

From https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit...:

1969, 1973, 1981, 1990, 2000, 2007 - a recession of US economy at least every 10 years, like a clockwork.

So, if you're a CEO of an airline and you're giving away 90% of your cash to shareholders instead of saving it to last few months when business declines, then it's an obvious failure of planning.

Or, more accurately, it's yet another case of "It Is Difficult to Get a Man to Understand Something When His Salary Depends Upon His Not Understanding It."

CEO salaries and bonuses are tied to performance of the stock (because they are set by board of directors, who are there to represent shareholders). So they spend the money to buy back the shares which increases the share price and their bonuses.

It's really simple if you know the incentives.

The big problem is that companies are focused on the quarter rather than the decade. Imagine the innovation we would have in technology if companies were willing to take a loss for years on worthy inventions, rather than only putting forward readily profitable projects.

The point is, unprepared leaders will see their firms go out of business, but based on the number of firms that seem to never be prepared, it seems the standard incentive isn’t enough. Thus it warrants discussion on how to align leadership incentives to prepare in advance. If we had businesses that could weather 3 months of crisis, whatever the crisis without triggering a depression the entire economy would be better off. Yet here we are.

Company leadership should focus on returning capital when appropriate. They should not be repurchasing shares at obviously inflated prices as a last-ditch effort to further raise share prices so they can cash out their bonuses. They should be using that money to improve the business.

Basically, leadership needs to think about long-term health, instead of making poor business decisions to improve executive bonuses.

2) Stock buybacks are simply a more tax-efficient way of distributing profits to shareholders. Redistribution of profit to shareholders is a fundamental trait of capitalism, so you can't really blame the CEO for doing this. You seem to be blaming CEO's for not preparing for a black swan event. If CEO's are forced to prepare for every possible black swan event, their companies would go nowhere.

So my question is, when do we learn?

What other events are you referring to?

I think the general sentiment is that we cannot just organically let most companies fail, so we are forced to bail out. But if we are breaking capitalism by bailing companies out, we should at least try to incetivize them to learn from mistakes rather than learn that they can do whatever when the times are good and get bailed out when the times are bad.

This is:

1. irresponsible, due to so called black swan events

2. price manipulation, don't forget this

2) Businesses exist to make a profit for their shareholders. Yes, they should have some retained earnings as a rainy day fund, but some of these companies are losing 75-100% of their revenue (airlines, cruises) and it doesn’t make sense to try and self-insure for the most extreme tail risk ever. So they return profit to shareholders. And for various reasons, buybacks are often preferred to dividends.

Would you be this up in arms if they had never done a buyback but had been paying a regular dividend to return those profits?

What mistakes? Is it a mistake to not keep a rainy day fund that will allow a company to weather a once-in-a-hundred-years shutdown of the entire economy? If this turns out to last a year, will you think it's a mistake that companies didn't keep a year's worth of reserves?

Especially since we're talking about SMBs here. Your local electrician, who has a staff of 3, should keep enough money saved up to pay all staff for the next year just in case?

You're saying a bunch of buzzwordy slogans kind of like "limited liability is bad" or "obligation to shareholders was invented by Friedman", but not dealing with the actual facts on the ground or the current catastrophe.

In the last 20 years we have had at least 3 “once in 100 years events”, so yes, maybe corporations should be required to be more prepared for down turns as a condition of being granted the right to operate with limited liability.

These are not buzz words, I practiced law in New York and worked on the bankruptcy of American Airlines, Lehman, GM and others. I saw the conditions on the ground, the incentives management responded to; I saw $200M bonuses for traders that lost $1B, I saw how decoupled management was from the risks they engineered. There is a prevalent attitude that as long as the short term reward hits before they quit then they should do it.

Since 2008, airlines have experienced one of the most profitable periods in their history with drastically lower competition and low oil prices. What did they do with that? They wasted significant amounts of cash on buy backs. American Airlines reduces outstanding stock by 37%, thats massive. Why? Because executives are taught in business school that there is an obligation to maximize shareholder value. No such obligation exists in law and I am arguing that is really bad social policy.

Employees are going to be decimated as this unfolds, are they more responsible or in a better position to plan for these once in 100 year events?

Fair enough - I was mostly talking in the context of the article (SMBs).

And to be frank, it sounds like you're much more knowledgeable about this issue than I am, certainly in terms of actual practice.

That said, I still disagree with you and not sure why you arrived at your conclusion.

Let's put aside for a second the question of whether shareholder primacy is good social policy or not in the general case - and I agree with you here - it's not mandated by law, and even if it were, we could change that if we decide it's bad policy.

Your specific contention here is that companies are using buybacks to prop up their share price, and thus are reducing their reserves. And that they should keep more reserves around.

So firstly - tax structure aside, I've never understood why anyone treats buybacks differently than dividend payments. It's just a way of giving money back to shareholders. Do you agree with that or not?

Secondly, how much reserves should a company actually keep? If this situation/recession drags on for a year, will you be saying that it's bad that companies didn't keep a year's worth of reserves? Two years?

I think that's both an unrealistic demand, and a supremely inefficient one. No company could've, nor should've, had to predict this kind of disaster happening, and been prepared for it. I'm generally a libertarian, but this is exactly the reason we have governments - this kind of crisis should be prevent by the government - both in terms of preventing a pandemic in the first place, and in terms of fixing the economy once we're in this situation.

In other words, I don't see any good way to change the market to incentivize companies to keep tons of cash lying around as a rainy day fund - and I don't think it would make sense for so many companies to hoard so much money. Much better to have them return the money to shareholders, to go invest in new companies.

Where do we disagree?

Who is this guy? Also where can I learn more about this and related topics. I’ve taken an interest to learning about our economic system in my free time and would love it if someone could point me to some good resources/podcasts/whatever.

https://www.forbes.com/sites/stevedenning/2013/06/26/the-ori...

The amazing thing is when you compare this with the history of corporate structures. For much of history after the joint stock ventures were created in the 1600s they were extraordinary one time grants from the king and only for very very risky ventures. Basically they were used to induce businesses that wouldn’t exist but were vital for society. In exchange there was an express charter that laid out the obligations of the firm. There were expectations on how the company would act in society. There were obligations to employees, bond holders, the community etc.

It is an insidious and morally bankrupt myth that this is the only purpose of a company.

If that return is at the cost of the stability and welfare of society at large then sorry, but no. No-one "deserves" a return and nothing happens in a vacuum. Larger society comes first, full stop. Seems this is a lesson we humans forget, and need to collectively and painfully relearn, every few decades.

Ah, the rallying cry of 20th-century tyrants. You can justify just about anything with that statement.

Clearly the past year has proven why it should have stayed banned.

Or maybe you’re suggesting we should have liquidity requirements for all businesses like we do for banks? That’s actually not the worst idea in a world where we’re going to be bailing companies out. If you want a bailout, you have to have a rainy day fund to make it less likely you’ll need one.

Yes, liquidity requirements and add personal liability for executives if their firm goes through bankruptcy, or restructuring. Goldman Sachs was a partnership until the 90s with each banker personally liable for the firms debts. They took risk much more seriously then.

So are buybacks

If you wouldn’t have chosen to reinvest your dividends, you can sell a fraction of your shares to achieve the same effect.

You may think there are social or cultural reasons why one return of capital is preferable to another (I can’t tell, you haven’t made any of those arguments as far as I can see), but mathematically, a return of capital is cash in existing shareholder hands, and there’s no difference between the two approaches.

Share buybacks have an impact on taxes paid, but we have a system where people are encouraged to minimize taxes, so you’d need to make an argument about tax rates for that to make sense.

It’s true that changing the number of shares for the same size pot of money has an impact on share based compensation schemes, but that’s an argument about not liking share based compensation.

If an executive is paid in stock, and has compensation tied to stock price then there is an incentive to conduct stock buy backs and not issue dividends. Further, declaring a dividend sets future expectations of performance that management is hesitant to be tied to as missing dividend payments lowers stock prices.

My point is that these incentives causes management to spend more company resources on buy backs than they would on dividends because there is a personal benefit. This harms stockholders because they lose the option to use the dividend. Not every investor wants to reinvest, some want to use the dividend. So no, they are not equivalent as you say. There are meaningful practical considerations that make dividends better for shareholders and buy backs better for managers.

> Stock buy backs make stock prices go up. Dividends do not.

Not true. https://en.wikipedia.org/wiki/Dividend_discount_model

> If an executive is paid in stock, and has compensation tied to stock price then there is an incentive to conduct stock buy backs and not issue dividends.

You're touching on agency costs (https://en.wikipedia.org/wiki/Agency_cost), which is a broader issue than stock buybacks. Management can always game their actions to favor their self-interest (compensation) over shareholder interests. They can also choose to invest in projects that will make the company look good in the short-term at the expense of long-term profits to shareholders, because management can always just stick around for a few year before shit hits the fan. See, e.g. what Jack Welch did to GE https://www.foxbusiness.com/markets/ge-ceo-feud-welch-vs-imm...

My point is the fact that share buybacks are yet another avenue for management to mismanage a company for their own benefit doesn't make them bad per se, or worse than stock dividends. Investors should evaluate share buybacks on a case-by-case basis to assess whether they believe

The solution is improved corporate governance predicated on having an top-tier Board of Director structure with a significant share of independent directors vs. an entrenched BoD. That's why ESG is an increasingly relevant theme. https://en.wikipedia.org/wiki/Environmental%2C_social_and_co...