This. The moral hazard here is enormous. And why should the Fed serve the interests of equity owners over the national interest in a strong, reserve dollar?
The equity holders are eating the losses; have you seen the stock market?
> Now, the Fed provides a third option: the holders of U.S. dollars, whose currency is devalued as money is printed to paper over the void which was opened up by the pandemic. And so the charade will continue.
Money is being temporarily created and lent, in exchange for collateral (bonds) to avoid a lack of liquidity caused by decreasing asset values and more hesitant lenders. Once things go back to normal, the money will be destroyed since corporations will return the money in exchange for the asset again. The net currency devaluation is 0.
This is a misconception. Loss or profit only happens when you sell your assets. Until then it is just economic potential. The trend of not paying dividends is at fault here. When you do not care about dividends but perceived future growth to earn money there is an incentive to over-commit and increase risk above any reasonable level.
Adding to that, if someone's "investments" last just a few days or weeks. Then that person is not investing, that person is just speculating. And, speculators should not be shielded of market readjustments. If anything they should fully pay to use the market as a casino.
But, back to the point, your assessment do not contradicts that companies are excessively leveraged and are not ready to survive though times. As the parent comment says, there is an incentive to leverage as much as possible and let the tax payers pay for the meltdown.
"American Airlines spent $13 billion on share buybacks for 10 years through 2019". They should have used that money more wisely. Why should the taxpayers give money away or lent money at close to zero interest when the companies had the money and dedicated it to artificially increase share prices?
This is a meme phrase; losses absolutely do happen before you sell your assets. (If I bought Enron at $90 and never sold, I didn't lose any money, right?)
> "American Airlines spent $13 billion on share buybacks for 10 years through 2019". They should have used that money more wisely. Why should the taxpayers give money away
You have two misunderstandings here. The Fed is not bailing out American Airlines by giving money away. That has to go through Congress. (I have no claims about whether bailing out AA is a good decision or not). Bailouts also generally are not free giveaways; the government often takes equity stakes.
> or lent money at close to zero interest
The Fed is lending everyone money at 0% to avoid a recession. Regardless of whether AA previously bought back their stock, they could still borrow at 0%. The Fed is doing this because the alternative (letting everything crash) is much worse.
> when the companies had the money and dedicated it to artificially increase share prices?
Share buybacks do not "manipulate the market" (not your words, but common phrasing among anti-buyback advocates) and artificially increase share prices. They return capital to shareholders. The share price goes up because the stock now represents a better return on investment (when AA buys back stock, it no longer a bunch of market cap tied up in money uselessly sitting around in a money market account).
When times get tough, AA can sell equity for more money, which is a stock buyback but in reverse. That's what could happen here. This ebb and flow (raising capital by issuing shares when you need it, returning capital when you don't) is the whole point of equity markets.
See https://www.bloomberg.com/opinion/articles/2020-03-17/the-go... for a more comprehensive argument about why share buybacks for airlines are more rational than holding money for a rainy day.
so why are they not doing this, but instead asking for low interest loans? (https://finance.yahoo.com/news/airline-ceos-promise-to-elimi...)
The reason is that raising equity dilutes all current shareholders. It's a bigger "loss" to them than a termed interest loan which the tax payer gets minimal reward for taking on the risk.
I say, that any bailout loans _should_ come with an equity dilution component. Tax payers should get compensated, or this moral hazard will just continue into the future.
But like venture funding, dilution is fine as long as it means that the company survives or grows. I'd rather own 1% of a billion dollar company than 10% of a dead one.
> It's a bigger "loss" to them than a termed interest loan which the tax payer gets minimal reward for taking on the risk.
Yes, I agree, but my key point is that buybacks are a natural part of equity markets and are not done solely to "manipulate the market" as commonly claimed.
> I say, that any bailout loans _should_ come with an equity dilution component. Tax payers should get compensated, or this moral hazard will just continue into the future.
Agreed, any exceptional bailouts through the government should come with an equity stake. I'm fine with lending to airlines at normal corporate lending rates without needing any additional compensation, though.
the problem is that the current bond and credit markets have seized up because nobody wants to lend (at "normal" rates). If the gov't comes into the market and act as a perfect lender of last resort, then true price discovery don't happen, and you cannot really know what the "true" corporate lending rate would be. That's my take on why it doesn't work without an equity stake for the gov't to do the lending.
It is not a meme, is how accounting works, is how governments tax. If you look at your own example, some people though that they had made a lot of profit with Enron, if they did not sold the shares then they only got losses.
Because the you only win or lose money when you sell your shares (not counting dividends if any).
UK law: "You’ll need to work out your gain to find out whether you need to pay Capital Gains Tax.
Your gain is usually the difference between what you paid for your shares and what you sold them for." - https://www.gov.uk/tax-sell-shares/work-out-your-gain
Until you sell there is NO gains as price varies in function of time. And it can go up or down.
The other claims are more complicated. It's difficult to discuss them if common accounting knowledge is not understood.
There is no one accounting standard that is the ultimate reality. Accounting is a means of representing reality for a particular purpose like any other model. And it can only change and attempt to improve with the understanding that an outside reality exists.
And "mark to market" is a thing that exists, and is sometimes required, anyway.
So I think you're completely wrong in a deep sense, but also in a shallow technical sense.
What is your definition of temporary? QE 1/2/3 were each supposed to be temporary. But each one was never enough, and fed smoothly into the next. Then they finally tried reducing their balance sheet and the repo market blew up. Then "Not QE" repo support was supposed to last two weeks. Then only a few months. Now "only" a year, and at a trillion dollars overnight and half that in 14 day operations. How certain are you that at year's end, overnight repo support will be less than $1T? On which track record of correct predictions from central bankers do you base this belief?
Since 2008, there's not a single Fed dot plot that has been even remotely accurate even six months out. SIX MONTHS. These people have absolutely zero credibility. They lied to you about the duration of QE 1/2/3, they lied to you about the duration of ZIRP, they lied to you about the direction and duration of rate hikes, they lied to you about repo market support amount and duration. During all this, they steadily changed their mandate from "price stability", to "some inflation", to "2% inflation", to "2% symmetric inflation", to "greater than 2% symmetric inflation".
But this time, with QE4, they're super cereal pinky swear scouts honor giving you every reason to believe that it's temporary.
Okay.
There are no actual free markets and there never have been; governments exist and always intervene in the market, and even if they didn't have something like the Fed executing monetary policy, there's typically the option of “past, present, or future taxpayers”; in the case of future taxpayers, often in part or in whole out of returns directly made from the gains from keeping the businesses afloat rather than letting them fail.
> And so the charade will continue.
What “charade”? It would only be a charade if the government pretended that monetary and fiscal policy wasn't part of the system of the economy, which it does not.
I know that's what the macroeconomics 101 textbook says, but is there any empirical evidence this actually drives higher inflation?
We've had historically low inflation for over a decade now[0], a decade during which the Fed has undertaken successive rounds of QE to the tune of $40-$85 billion per month.[1]
[0] https://www.usinflationcalculator.com/inflation/historical-i...
[1] https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1,_QE...
- Inflation gets 'exported' along with production to countries with lower manufacturing costs (because globalization). So no inflation but no working class either, resulting in income inequality - a problem of its own.
- Depending on jurisdiction, inflation should include or adjust the weight of house prices (Eurozone), education costs, medical costs. These are goods that cannot be outsourced, hence they reflect higher inflation.
- Shrinkflation - https://www.economicshelp.org/blog/24369/inflation/shrinkfla...
Driving inflation up from low is a nominal goal of QE but the magnitude varies.
We are also talking about companies that are leveraged to the tits to juice their return on equity. What is glossed over in all of these discussions about bailouts is that the managers of these corporations respond directly to financial incentives, and the existence of a "lender of last resort" such as the Fed ensures that corporations will tend to leverage their balance sheets far beyond a level commensurate with the actual risk of the underlying business.
> We are talking about companies which have plenty of assets and strong businesses.
Except that those assets are owned with borrowed money. Someone has to eat the losses, and in an actual free market there are two options: the equity holders, or the bondholders. Now, the Fed provides a third option: the holders of U.S. dollars, whose currency is devalued as money is printed to paper over the void which was opened up by the pandemic. And so the charade will continue.