The Federal Reserve started buying corporate bonds Tuesday as part of a $250 billion program funded by the CARES Act, which was approved back in March. The idea is to backstop corporations and their employees.
[...]
Whalen said the Fed wants to be sure companies have all the money they need to weather the pandemic. The Fed is also making this program anonymous — just buying up corporate bonds without anybody asking it to. That avoids any stigma from companies requesting Fed help.
I feel like this should be a stigma. If you need a bailout using government funds, then the public should be able to see. Local small business, sure, provide that assistance (although it should...
That avoids any stigma from companies requesting Fed help.
I feel like this should be a stigma. If you need a bailout using government funds, then the public should be able to see.
Local small business, sure, provide that assistance (although it should really just go straight to the employees). Mega-corp in every state? Eat those losses, or face public shaming.
This is probably based on historical experience with bank runs. Typically, banks won't take funding if they're afraid it will make them look vulnerable and everyone will withdraw their money. One...
This is probably based on historical experience with bank runs. Typically, banks won't take funding if they're afraid it will make them look vulnerable and everyone will withdraw their money. One solution is to have everyone do it. Another would be to do it anonymously.
A similar thing happens when investors get worried about a non-bank and they can't get funding anymore. The assumption is that the company is basically sound and if they got additional funding to make it past this crisis, they would be profitable after it's over and pay back the money. In that case, letting them go bankrupt would be a waste.
This is why the standard they are using is that the bonds were rated "investment grade" before the crisis (as opposed to "junk bonds").
Under this program, the companies aren't choosing the be invested in by the fed, the fed is choosing them. In this case the stigma the fed is trying to stave off is the stigma that a private...
Under this program, the companies aren't choosing the be invested in by the fed, the fed is choosing them. In this case the stigma the fed is trying to stave off is the stigma that a private entity might be weak because it's bonds are being paid with federal funds. But the fed doesn't care about public shaming, it's about investor confidence (as Kathryn Judge mentions in the article).
All in all I don't think the Fed should be investing in corporate bonds at all.
In my opinion, investing in individual bonds is a form of picking winners and losers and propping up industry they the Fed should not take part in. I don't have much problem with Quantitative...
In my opinion, investing in individual bonds is a form of picking winners and losers and propping up industry they the Fed should not take part in.
I don't have much problem with Quantitative easing, or certain ETF buying, as generally that does not explicitly help any particular company. I just both worry that A) this is further entrenching the special relationship between large corporations and the government and B) we will enter a phase where the economy is majorly and artificially propped up by the central bank.
I never thought I'd get to this point, because I generally am very pro FED
I don't know about the economy, but it seems undeniable that markets and therefore many businesses are being propped up by the Fed. (Apparently with some irrational exuberance from bored gamblers,...
I don't know about the economy, but it seems undeniable that markets and therefore many businesses are being propped up by the Fed. (Apparently with some irrational exuberance from bored gamblers, but if the Fed is really going to do whatever it takes, maybe they're right?)
The virus is a very good excuse for not being profitable, particularly in entertainment and travel-related sectors. Waiting until the crisis is over to start letting business fail again doesn't seem so bad?
It's too bad Congress doesn't share their enthusiasm. Ordinary people could use a bailout.
My main issue is with the ways the bailouts are being handled, not with the magnitude. I'm mostly just worried of intensified cronyism and reduced FED independence that might arise from these...
My main issue is with the ways the bailouts are being handled, not with the magnitude. I'm mostly just worried of intensified cronyism and reduced FED independence that might arise from these arrangements.
From the article:
[...]
I feel like this should be a stigma. If you need a bailout using government funds, then the public should be able to see.
Local small business, sure, provide that assistance (although it should really just go straight to the employees). Mega-corp in every state? Eat those losses, or face public shaming.
This is probably based on historical experience with bank runs. Typically, banks won't take funding if they're afraid it will make them look vulnerable and everyone will withdraw their money. One solution is to have everyone do it. Another would be to do it anonymously.
A similar thing happens when investors get worried about a non-bank and they can't get funding anymore. The assumption is that the company is basically sound and if they got additional funding to make it past this crisis, they would be profitable after it's over and pay back the money. In that case, letting them go bankrupt would be a waste.
This is why the standard they are using is that the bonds were rated "investment grade" before the crisis (as opposed to "junk bonds").
Under this program, the companies aren't choosing the be invested in by the fed, the fed is choosing them. In this case the stigma the fed is trying to stave off is the stigma that a private entity might be weak because it's bonds are being paid with federal funds. But the fed doesn't care about public shaming, it's about investor confidence (as Kathryn Judge mentions in the article).
All in all I don't think the Fed should be investing in corporate bonds at all.
Why not?
In my opinion, investing in individual bonds is a form of picking winners and losers and propping up industry they the Fed should not take part in.
I don't have much problem with Quantitative easing, or certain ETF buying, as generally that does not explicitly help any particular company. I just both worry that A) this is further entrenching the special relationship between large corporations and the government and B) we will enter a phase where the economy is majorly and artificially propped up by the central bank.
I never thought I'd get to this point, because I generally am very pro FED
I don't know about the economy, but it seems undeniable that markets and therefore many businesses are being propped up by the Fed. (Apparently with some irrational exuberance from bored gamblers, but if the Fed is really going to do whatever it takes, maybe they're right?)
The virus is a very good excuse for not being profitable, particularly in entertainment and travel-related sectors. Waiting until the crisis is over to start letting business fail again doesn't seem so bad?
It's too bad Congress doesn't share their enthusiasm. Ordinary people could use a bailout.
My main issue is with the ways the bailouts are being handled, not with the magnitude. I'm mostly just worried of intensified cronyism and reduced FED independence that might arise from these arrangements.