Sometimes, writers used to say that someone cried their heart out that their eyes had gone dry. No more tears left. Similarly, I have no more words to expend on the disproportionate responses of the US Federal Reserve. They are now locked into the ever-increasing downward spiral of monetary support to all areas of financial markets that are also increasingly fiscal in nature. The denouement is that the global monetary regime ruptures and that a new regime is needed.
For all the actions taken by the Federal Reserve since March, pl. see this blog post by Lance Roberts. It is a ‘must-read’ otherwise too.
Note that it does not mean that RMB takes the place of the US dollar. But, there would be disruptions and instability.
From a FT commentary on the Federal Reserve actions of 9th April 2020:
… the expansion of the Fed’s crisis-fighting toolkit to encompass riskier debt — including debt issued by companies owned by private equity firms — will be controversial. One investment industry insider argued it was tantamount to an indirect bailout of the private equity industry.
“If you think people were upset about bailing out banks where the CEOs were making $50m a year, how are they going to feel about bailing out private equity firms where the CEOs make $500m a year?” said another investor.
Some investors in the municipal bond market also chafed at the Fed’s initiative, saying the central bank had not yet gone far enough to support states and cities. [Link]
Clearly, interventions that were meant to support the real economy had extended into interventions to support ‘fallen angels’ and even Exchange Traded Funds. What is the economic payoff to this? What is the threat to systemic stability if the junk bond ETFs failed?
Ed Harrison of ‘Credit Writedowns’ wrote the following:
I don’t like any of this. But this is the situation we find ourselves in. There are no good choices here.
Nevertheless, while I can understand the Fed’s decision to protect fallen angels, I see with the Fed’s decision to buy high yield ETFs as a step too far. These are risk assets. And the Fed is taking the risk away. Long after the exigencies of the day have passed, these decisions will have lasting consequences.
Moreover, where do you draw the line? Why has the Fed left the leveraged loan market untouched? Aren’t those companies just as innocent as the ones in the high yield ETFs? Don’t tell me it’s the fact that its an ETF that matters here. That’s a fig leaf and you know it. [Link]
Writing a day after the Fed announcement (a cincidence?), this short blog post at the Federal Reserve Bank of St. Louis concedes why and always the Fed acts?
The stock market’s wild ride was doubtless one consideration that prompted the government and the Federal Reserve to take actions in March to shore up the economy and facilitate the functioning of financial markets. Congress and President Trump responded with two modest emergency spending packages on March 6 and March 18, suspension of payments on student debt, and finally a $2 trillion stimulus bill, which was passed on March 25 and signed on March 27, 2020. [Link]
James Grant of the eponymous ‘Grant’s Interest Rate Observer’ was his usual pungent best when he wrote for WSJ:
If not for the buildup of the financial excesses of the past 10 years, fewer such monetary kitchen sinks would likely have had to be deployed. No pandemic explains the central bank’s massive infusions into the so-called repo market that followed this past September’s unscripted spike in borrowing costs. For still obscure reasons, a banking system that apparently is more than adequately capitalized was unable to meet a sudden demand for funds on behalf of the dealers who warehouse immense portfolios of government debt. [Link]
Too much leverage caused the 2008 global financial crisis. Central banks responded with policy measures that incentivised accumulation of further debt and increased moral hazard. The result is the leverage crisis of 2020. Covid-19 was only the last straw.
To be sure, the Federal Reserve is not done yet. They can buy stock ETFs and then stocks themselves. Then, there is direct funding of US Treasury borrowing. There is nominal GDP targeting and negative rates.
Wow! The Federal Reserve is far from having run out of ammunition. They have enough instruments to respond to the next pandemic! They are far from done! Bring ’em on!
Critics will have thrown in the towel far earlier and far more easily than the Federal Reserve would.