fed Markets

Main Street, Wall Street, Depression Carte Blanche And The Coming Witch Hunts

"We found a witch, may we burn her?"

The latest “outrage” from the Fed came on Thursday, with the announcement that the Main Street lending program will be expanded.

Initially, the goal of the program was to ensure credit continued to flow to small- and medium-sized corporates who could plausibly be described as “in sound financial condition before the pandemic”.

That’s still the raison d’être, but some of the updates to the program drew immediate criticism from those looking for yet another excuse to suggest (tacitly or otherwise) that the Fed is using the crisis to hand money to companies that don’t “deserve” it or to “bailout” Wall Street. Here’s the “offending” passage from the new terms:

Additionally, businesses with up to 15,000 employees or up to $5 billion in annual revenue are now eligible, compared to the initial program terms, which were for companies with up to 10,000 employees and $2.5 billion in revenue. The minimum loan size for two of the options was also lowered to $500,000 from $1 million. With the changes, the program will now offer more options to a wider set of eligible small and medium-size businesses.

As you can imagine, not everyone agrees with the notion that a business with, say, $4.5 billion in revenue and/or 14,000 employees counts as “medium-sized”.

Bloomberg’s Cameron Crise was quick to scoff at the new guidelines. “By my calculation, more than 40% of the S&P 500 qualifies for participation in this program”, he wrote. ‘”Main Street’ indeed”.

The Fed also announced a new loan option under the program (there are three now) that will expand access to more leveraged entities on the stipulation that the lender retains a larger share of the loan. Under the “priority” option, lenders will be subject to 15% risk retention and the maximum loan size is the lesser of $25 million or six times a borrower’s income, adjusted for interest payments, taxes, and depreciation when added to existing debt.

All three options are LIBOR +300bps.

Crise suggests that’s pretty generous. “Just about anyone who’s ever borrowed money to pay for college is paying a lot more than that come Ragnarok or Armageddon”, he wrote, in a subsequent tweet expanding on his original Bloomberg post.

I’m absolutely sympathetic to the thrust of that (as we all should be) but let’s face it, this is an apples-to-oranges comparison, at best.

First, from a kind of cold-hearted perspective, there is no sense in which you can compare a company with, say, $3 billion in pre-COVID revenue and 12,000 employees, to a would-be indebted undergrad. Anyone who has ever tried to model default rates inclusive of the myriad deferral options and multi-tiered repayment choices offered on student loans (both government-backed and private), knows you might as well just call a good chunk of it bad debt.

Second (and far more importantly) the whole discussion is a false equivalence. It is by now painfully obvious to most sensible people that one way or another, America’s student debt burden will have to be forgiven and college will eventually become free. The current system isn’t sustainable in any sense of the word. The ~$1.6 trillion Americans now owe in student debt is never going to be paid back. Period. All those loans are doing is serving as an albatross around the necks of young adults who might otherwise be buying homes or, at the very least, consuming goods and services to the benefit of the broader economy.

The point is, these two issues (the expansion of the Main Street lending facility and America’s student debt problem) don’t belong in the same discussion. One is a narrow debate about the parameters of an emergency lending program for corporations, and the other is a macro discussion about the relative merits of a Progressive solution to one of the country’s most vexing, endemic economic problems.

Some lawmakers did, in fact, argue that the crisis offers as good an excuse as any to move ahead with plans to forgive student debt, and Trump did take some steps to alleviate the monthly payment burden. But until Congress gets totally on board with the idea of just writing the entirety of that $1.6 trillion pile of toxic waste off, there isn’t much the Fed can do.

Meanwhile, if you’re curious to know why the Fed decided to expand this particular program as they did, the short answer is obviously because they were lobbied relentlessly at their own invitation. To wit, from the statement:

When the initial terms of Main Street were announced, the Board indicated that, because the financial needs of businesses vary widely, it was seeking feedback from the public on potential refinements. More than 2,200 letters from individuals, businesses, and nonprofits were received.

But more generally, I’m growing increasingly weary of belabored attempts on the part of what seems like a larger and larger percentage of market participants to spend every waking second pretending as though they don’t understand why it is that the Fed is willing to take on more risk and, yes, chance funneling large sums to entities which may not deserve it.

There is a clear rationale behind this cavalier behavior by the Fed. That rationale is that the US economy is in a depression. Personal spending data out Thursday showed consumption plunging 7.5% in March. If you had to confine yourself to what, before COVID-19, would have been a “reasonable” range for the y-axis, you wouldn’t have been able to show that on a chart. Have a look:

Also on Thursday, the Chicago PMI printed in the 30s. This isn’t a particularly crucial data point, but I include it just to underscore the extent to which depression-like numbers aren’t just a daily thing, they are an hourly thing, now. From the time traders turn on their monitors until around 11 AM in New York, it is just shocker, after shocker, after shocker. And that’s not even counting the deluge of horrible news flow from the overnight session.

This is why the Fed is unconcerned about moral hazard, and why you should be similarly unconcerned right now.

If what you want is “justice” and “accountability” when it comes to where all of this support is going, fear not, good Samaritan. Because when this is all over, you can be absolutely sure that every lawmaker on both sides of the aisle is going to go looking for witches to burn. And there will be no shortage of them.

These facilities will be scrutinized relentlessly for who got what from whom at what price and when, if for no other reason than the fact that it provides virtually unlimited opportunities for Democrats and Republicans alike to do their best Monty Python impressions on the way to leveraging the spectacle for political gain. “We found a witch, may we burn her?”


20 comments on “Main Street, Wall Street, Depression Carte Blanche And The Coming Witch Hunts

  1. ok. i’m LingOL … I read almost every post here, but this one is one of the best – very serious topic, but very funny (and sadly probably will pan out exactly that way)

  2. Prof H- Do you have kids?

    Did they work their ***** off to graduate at the top of their high school classes ( giving up a lot of social/fun opportunities) as well as at jobs to earn money to pay for college? Were they ineligible for financial aid? Did they spend hundreds of hours applying for academic scholarships to help “pay” for college?
    Did they graduate debt free, from their own efforts, or graduate and owe 5 years of service to the military in exchange for a “free education”?

    How about the US government give everyone graduating, or recently graduated, a credit— which can be used to pay off student debt or against future income taxes?

    Seems a bit more fair, IMHO.

    • Honestly this is exactly what I would advise. Make college cost tax refundable retroactively for anyone alive today. Debt relief for those tied down and stimulus for those who slogged through it. I’ve spent 12 years repaying my debt and worked full time all through college but the rate it was increasing in cost was like 25% a year. By the end I was barely covering living expenses with a lab internship that paid a comparably royal sum of 12.5 per hour. Shit just the campus fee was $6k per year by the time I graduated up from $600.

    • Unfortunately, all of that is irrelevant for one very simple reason: This is a $1.6 trillion debt burden. It is never (ever, ever, ever) going to be paid back. All it’s going to do is grow, and grow, and grow. It has to be forgiven. If it’s not, it will eventually choke the economy. Is that “fair” to someone who paid their way through college or who worked hard to pay off their loan? No. But, those people may find that their economic livelihoods are being adversely affected by subdued consumer spending and delayed household formation as a result of this absurd pile of debt. At a certain point, practicality has to prevail over “fairness”. This debt pile ($1.6 trillion) is cartoonish. It’s even more so now that millions of the people who owe it are jobless. What is the societal utility of pretending as though it’s ever going to be repaid? So that we can say we were “fair” to the people who paid for their college? Sorry, but past a certain point that’s just cutting our nose off to spite our face. What happens when it’s $5 trillion? Or $10 trillion? It’s ridiculous. We need to modernize and come around the reality of this situation: A lot of that is government-guaranteed. It can be key-stroked off the board. The sooner we do it, the better.

      • Lets forgive car loans and government backed mortgages too!!!

      • Certainly, the issue of fairness is not likely to actual be worked into anything and honestly I would prefer it be unfair rather than have it not happen. It does get a bit hard to continually be beaten down by economic realities. Start out cash poor and poorly compensated due to the GFC and college, then have to content with all time highs in housing prices while compensation never grows to keep up with inflation. Even student debt forgiveness basically just ensures that this and the next generations will not be so impoverished that they simply have no choice but to forgo consumer spending on top of marriage, home ownership and child rearing entirely. It isn’t enough in the long run to give Gen Y or Z any chance of success. That will take addressing the issues that caused us to reach this impasse.

        • This is also an infinite regress.

          Taken to its illogical extreme, I could use the same line of argument to say that if Keebler gives out coupons for 30% off fudge stripes next month, everybody in the entire history of fudge stripes has been wronged.

          After all, they worked hard and paid full price for their fudge stripes. So Keebler should therefore refund every fudge stripe customer the equivalent of 30% off the inflation-adjusted purchase price going back however long fudge stripes have been around in order to make it “right”, and “just” and “fair”.

          Point being: When some folks get a giant break, it doesn’t mean that everyone in history who has, at one point or another, been in similar circumstances, gets the equivalent of that same break.

          • A little different to compare purchasing a college education ( a one time purchase) to a repeated purchase.

          • If approximately 70% of college graduates have debt and USA decides on forgiveness- why would anyone oppose treating the remainder (30%) equitably to the 70%? If the country is going to spend $1.6 trillion on debt forgiveness, why would anyone be opposed to spending $2.3T??? Since we can print ( for free) why punish those who sacrificed to achieve a debt free life?

      • The point is, these two issues (the expansion of the Main Street lending facility and America’s student debt problem) don’t belong in the same discussion… there isn’t much the Fed can do.

        They do when you’re talking about the massive and growing wealth gap that will undoubtedly be exasperated by the feds current actions. Not that the fed is wrong to take such actions. But the issue will become harder to ignore as we move closer to record market highs and record unemployment highs simultaneously.

        In a world where the fed directly buying stocks isn’t off the table and is currently buying junk, is it not fair to question why the fed can’t (won’t) buy securitized student debt, or credit card debt or anything else on the demand side?

        Maybe we’ll just blame Mnuchin.

  3. In the abstract………Water runs downhill generally meandering to the path of least resistance..The canyon wall get steeper as the water cuts deeper..Creeks become rivers and the sailing get smooth and lazy..Getting out is not mandatory one can choose to drift indefinitely..

    Today’s society has a similar trajectory by artificially induced Sloth…The hard and objectionable aspects of daily living have been outsourced and replaced by palatable alternatives creating a distracted indolent public that wants life forever easier. Easier become a habit , existential threats having been removed in this case by Government… What we are left with as a consumer economy that when properly engineered can consume as much or more than it produces , the supply of consumables coming from afar at cost basis adjusted for areas with less developed standards of living…A distracted public sufficiently entertained is a primary ingredient to generating huge profits domestically.

    This situation is really an attempt to salvage the consumer (profit) for the system (rulers )….salvaging their elevated privileged status. There is little intent for a moral issue here it is merely a pattern repeated throughout History..even in the days of Feudalism… Change comes at a pace of it’s own choosing… In this case the Natives are restless and the Rulers sense their Position … Change is coming and as Ray Dalio has implied we are pretty far along in the cycle….(Extreme Fed /Govt tactics of the Monetary nature)

  4. Not a single hair on any witches head came near a bonfire after GFC1 & rest assured, no witches will be burned in GFC2, however, poverty level people and that exploding class, will suffer, while fat cats grow to massive Zeppelin balloon dimensions.

    • The difference is, there’s nothing illegal about taking a loan that’s offered to you. Participating in a Fed facility isn’t the same as mortgage securities fraud or benchmark rigging.

      What’s going to happen here is that Congress is going to demand a list of everyone who participates in these facilities and anyone who a given politician doesn’t like is going to get roasted assuming they can’t justify their participation.

      There have already been witches: Potbelly and Shack Shack, for example. And the LA Lakers. And on and on.

      I’m not defending those folks (in fact, I roasted Shake Shack in these very pages), but witches there have already been and witches there will continue to be.

      If what you’re looking for is bank CEOs in jail, well, you can forget about that under any circumstances. And besides, I’m not sure what the rationale for that would be in this particular scenario.

  5. It is that moment in time to set aside recrimination and look forward to New social structure. We are headed from The New Deal to the Next Deal, and part of that has to be debt forgiveness, linked to meaningful programs that will help people to be productive, and that may involve creative destruction, where our education system is rebuilt from the ground up. Too many schools churn out pointless degrees linked to unmanageable debt. It’s unproductive from top to bottom and then linked to an insane healthcare system linked to poison polarized politics. This seems like a time to make sweeping changes, versus a time to embrace Russian like decay …

    • Having read and been persuaded by Strauss & Howe, John Mauldin has been writing about the Great Reset (debt forgiveness with a purpose) for a few years now. He’s convinced it’s coming (as am I), and that COVID has accelerated the inevitable day of reckoning.

  6. The Fed stepping into lending is more a sign of political dysfunction than the Fed looking to bail out corporations and Wall St. A TARP or government loan guarantees for bailouts as was done for Chrysler in the early 80s is not politically possible and so it is shoveled over to the Fed, which is ill equipped to serve as a direct lender. We shouldn’t expect a bunch of economists, as brilliant as many of them are, to become adept commercial lenders overnight. The program may have been enlarged in terms of eligibility but that may be due to anticipating under-subscription and the Fed may really want to get every dime out the door and into the economy.

  7. H. The bank CEO’s should have gone to jail for the sub-prime mortgage debacle.

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