You can’t help but laugh – or at least emit a despairing chuckle.
The discrepancy between, on one hand, headlines trumpeting further gains on US equity benchmarks, and, on the other, the tone of stories documenting economic despair, the disintegration of the country’s social fabric, and the hideous perversion of American democracy, is nothing if not comedic. It’s tragicomedy, to be sure – but it’s comedy nevertheless.
That’s not to say there’s anything funny about mass joblessness, obscene inequality and the nation’s inability to move past deadly racial stereotyping and endemic xenophobia. Rather, the juxtaposition between “Stocks press higher erasing pandemic losses as bears capitulate” and “Pentagon chief says military doesn’t support invocation of Insurrection Act“, suggests a state of affairs so patently ridiculous that incredulity is the only emotion we have left.
It’s not that laughter is the best medicine, it’s that we have no other frame of reference – no lens through which to view things anymore. It is farce. Pure farce.
There’s no use blaming central banks. As I’ve gone to great lengths to explain, the Fed used the tools at its disposal to avert a calamity – to preserve whatever jobs were left – to prevent the market’s plumbing from freezing altogether – to forestall a cascade of systemic credit events – to stop the global liquidation of US Treasurys as the world rushed to raise US dollar funding in a panic.
Faced with the single-most harrowing bout of market turmoil in 100 years, and staring down the prospect of a total economic collapse, Jerome Powell did what he had to do.
Unfortunately, fiscal policy has been missing in action for a decade. That means that by the time a crisis acute enough to force politicians to roll out massive stimulus came calling, a decade of incremental monetary easing had pushed the wealth gap to extremes.
When the pandemic hit, it disproportionately affected those in low-paying jobs. It hit minority communities hardest. It further exposed the nation’s broken healthcare system. It pushed America to the brink, and the death of George Floyd shoved the country over the edge.
It takes time to mail out checks. It takes time to pass legislation. It takes time to dole out loans to small businesses. It takes time to process 40 million jobless claims in a system that’s not built for a tsunami of layoffs. The only institution with the capacity to act in real-time and make a difference was the Fed.
And yet, their toolkit is such that the actions they take are destined to work in trickle-down fashion. So, we are where we are. A massive dose of monetary morphine has the patient (the market) high as a kite – almost totally numb to the injuries inflicted upon the corporations whose shares and bonds are on the way to recovering the entirety of losses incurred during the panic.
Everyone’s a critic, of course. As if there were another, feasible option in late March.
Guggenheim’s Scott Minerd on Wednesday correctly asserted that the Fed sent the world a “buy signal” via its primary and secondary market corporate credit facilities. Chair Powell, Minerd told Bloomberg, is forcing companies to lever up even further. You’ll recall that investment grade issuance topped $1 trillion year-to-date late last month.
But companies weren’t borrowing in March and April and May in order to engage in the usual financial engineering (i.e., borrowing to buy back shares). They were borrowing to ensure they could weather a once-in-a-century storm.
It’s true that these companies are now more leveraged as a result. It’s also true that the debt burden could prove to be too much down the road – that companies won’t be able to service it. If revenues remain depressed due to structural damage from the crisis, the situation will be even worse. Coverage ratios could fall. Downgrades could occur (Guggenheim sees $1 trillion of downgrades in the cards). As Minerd warned on Wednesday, the corporate bond market could become “addicted” to Fed support.
While Minerd is characteristically long on criticism, he’s short on suggestions. What, exactly, would have been a preferable solution? Allow a wave of major corporate credit events? Or maybe leave taxpayers to clean it up through bailouts like the $60 billion package Boeing requested for itself and its suppliers prior to the Fed announcing its support for the credit market?
“Moral hazard” makes for great headlines. But adopting it as a guiding principle for crisis-era policymaking is a recipe for disaster.
Minerd is not alone. Mohamed El-Erian weighed in recently with a similar take. In an opinion piece for Bloomberg, El-Erian conjures a false equivalence:
Early on in my career at Pimco, I remember Bill Gross, the firm’s founder and legendary investor, reminding portfolio managers that “there are times when the best thing to do is to do nothing.” It’s important advice as most PMs are conditioned to continuously look for opportunities and react accordingly. They naturally get fidgety when market conditions dictate that the best thing to do is simply wait. The cost of ignoring Gross’s advice ranges from unnecessarily wasting money on bid-offer spreads to ending up with less-optimal portfolio positioning.
Gross (long live the real “Bond King”), was simply advising PMs not to trade when they didn’t have to. In no way is that applicable to policymakers acting to avert a panic. Jerome Powell isn’t buying corporate bonds and funding every kind of asset under the sun because he’s itching to trade. He’s doing it because he doesn’t have a choice.
Somehow, that is lost on El-Erian, or at least when he’s writing opinion columns it is. “Gross’s advice should be heeded by Fed officials who are under pressure by markets to do more”, he says.
With all due respect, no, Mohamed, the Fed should not be guided by your recollection of something Bill Gross told you decades ago about trading individual bonds. That is ludicrous.
To be fair, El-Erian does go on to make some valid points, namely that market functioning has been restored, volatility has fallen and companies are clearly able to tap the primary market.
El-Erian could have just said that (in a tweet, or something) and let it go. Instead, he folded that simple observation (that it may be time for the Fed to take a step back and see how things develop), into a needlessly critical Op-Ed.
After conjuring a younger Bill Gross, El-Erian cites an unnamed “prime minister” he spoke to in the 80s. This unidentified world leader explained a decision not to counter foreign aggression by a hostile government with the following bit of advice for Mohamed: “Be careful when taking an action that risks unintended consequences and is not easy to reverse”.
That is totally nebulous. What would be the opposite of that “advice”? “Shoot first and ask questions later”? Or maybe “Always act impulsively, even when the possible negative side effects are irreversible”?
Let’s face it, El-Erian’s latest Bloomberg opinion column is the same Bloomberg opinion column he’s been writing on a bi-monthly basis for years. Each one of them could easily be mistaken for the last. They are cookie-cutter blogs, designed for mass appeal and always written with just enough scary-sounding buzzwords to grab some headlines. Here’s that obligatory ominous paragraph from his latest:
By continuously intervening in market pricing or taking policy rates negative, or both, the Fed would risk creating not just additional distortions but also “zombie markets” – that is, markets that no longer send accurate price signals and that fail to play an efficient role in mobilizing and allocating capital. This undermines productivity, hurts the potential for growth and risks financial instability.
Again, it’s not that he’s wrong, it’s that he’s been writing some version of that paint-by-numbers warning for so long, that I’d be willing to bet he has various iterations of that paragraph stored in a Word document called something like “BoilerplateWarnings.doc”.
Insult to injury is added when El-Erian confuses the problem with the solution. To wit:
By contributing to higher wealth inequality and dragging the Fed deeper into ‘quasi fiscal’ funding operations, the central bank also risks its credibility and political autonomy.
The best way to ensure that the trillions the Fed digitally conjures don’t end up contributing to inequality is to admit that if we’re going to acquiesce to a world in which monetary policy works through large-scale asset purchases, that policy absolutely must be coordinated with elected officials (sane ones, obviously).
Otherwise, what do we have? We have trillions in ostensible stimulus being channeled through the nation’s largest banks, as opposed to being channeled directly to the economy via programs designed specifically to put Americans to work or to otherwise boost the country’s productive capacity and create a better standard of living for everyone.
El-Erian seems to realize Congress has a role to play, but he stops short of connecting the dots – deliberately, in my judgement. Consider this (abridged):
The policy priority now rests squarely with Congress and the White House and includes Another round of more focused relief measures to help those segments of the population in considerable economic pain and suffering, improving safety nets to reduce the probability that household economic insecurity will undermine consumption in the economic recovery phase, [and] combating the likely downward pressures on productivity and growth potential through infrastructure modernization efforts, labor retooling and retraining programs and expanded public-private partnerships.
All of that costs money – lots of it. If you assume that money has to come from somewhere, then there are (basically) two options: Sell debt or raise taxes.
Suffice to say the latter isn’t popular, especially in a recession, which is why America is currently doing the former. And guess who’s buying the debt? Here’s a hint:
Now, you tell me, dear reader: What kind of sense does it make for that blatant debt monetization by the Fed to be occurring at arm’s length?
Why doesn’t El-Erian or Minerd, or anyone else who complains about Fed policy exacerbating inequality, openly call for the abolition of the mechanism through which that perpetual motion machine of inequality creation works?
Why do none of these critics state the obvious, which is that if we do away with covert deficit financing/debt monetization and replace it with overt debt monetization, Fed accommodation will cease to manifest as liquidity riding the financial asset merry-go-round, and instead show up as real jobs, for real people, in the real economy?
Consider the following from Rabobank’s Michael Every (from a note dated Tuesday):
I am far from the first to say it, but this is socialism for the rich and raw capitalism for everyone else. As such, the results are obvious. Even during COVID-19, which is devastating the economy, pushing unemployment to depression levels, slashing incomes, destroying small businesses, and upending global supply chains, the rich and powerful have become vastly richer and more powerful in both nominal and relative terms. Heads they win; tails you lose. Until we all lose.
The only logical exception is if QE becomes MMT and is spent on ordinary people by the government. The other alternative is raw capitalism for everyone, major trust-busting, and an epic asset-price reset: But that Austrian cure is probably going to kill the patient at this stage.
Yes, if we were to see MMT really embraced then it changes domestic political dynamics; we can burn the economics textbooks – which we should be burning anyway; and it opens up a host of geopolitical problems. However, if the alternative is social breakdown and the army on the streets, which one looks more attractive?
The likes of Jeff Gundlach will tell you the reason they don’t address the questions posed above is because debt monetization is too good to be true. MMT is a “free lunch”, they’ll say. And “everyone knows there are no free lunches”. (El-Erian has addressed MMT in quasi-favorable terms – there’s an example here.)
Well let me tell you something, folks: The likes of Gundlach, El-Erian and Minerd have been getting a free lunch for years thanks to the very same dynamics they so readily decry in tweets, Op-Eds, and “outlook” pieces, which are consumed as gospel by the investing public.
They deride Jerome Powell, Janet Yellen, and other central bankers for ignoring “moral hazard”, while failing to connect the dots for the public and refraining from placing the blame where it belongs: On elected officials who collectively refuse to legislate in the interests of everyday people, preferring instead to perpetuate a system that only works for people like Gundlach, El-Erian and Minerd.
US equities rose a fourth day Wednesday. It was the seventh gain in eight sessions. The market might as well be back to pre-COVID levels.
Millions are jobless. Gundlach isn’t one of them. Neither is El-Erian. Neither is Minerd.
Where’s your damn free lunch?
The Fed is not managing risk it is suppressing the cost risk premiums. To this point the Fed has been able to mask the significance of that difference, but at an enormous cost. Not sure that can be done forever because I seriously doubt enough corporations or governments (Illinois and NJ come first to mind) can pay the bills coming due.
NB: The Fed just extended its municipal lending program to include municipalities of any size and transit authorities among others (and, of course, Illinois was first in line). Very prescient. Very worrisome for what it portends.
No, it is not worrisome. What would be worrisome is the opposite (i.e., if you just left everyone to twist in the wind).
You cannot let borrowing costs for local governments go through the ceiling and you cannot let states go broke.
Everyone has seemingly gone crazy (likely from reading too much click bait from people like Minerd and Gundlach and Howard Marks).
It is incredible (absolutely incredible) that anyone believes that people like Powell, Lael Brainard and Mary Daly, are somehow the problem, while billionaires with Twitter accounts are the people who know what’s best.
It’s totally insane.
I wrote “prescient” as I believe the Fed has correctly anticipated the arena of real danger and is taking appropriate steps. Even more would be better. As for letting states go broke –Argentina does it all the time and in our own history Arkansas Maryland and, surprise, surprise Illinois (I guess old habits die hard) among others defaulted on huge tranches of foreign held (i.e. England) debt in the 1840s. They remain with us today. Is it a good thing? Quite right — no it is not. Personally, I believe that the assumption of state and municipal debt by the Federal government with a bond buying assist from the Fed would be a much better way to go –a Funding Act for our own “Revolution” –Alexander Hamilton can still teach us a thing or two about public finance.
I would want to give kudos to Summers too.I think Powell is to be admired for his own change of mind. After all, he was trying to unwind the balance sheet and raise rates the folly of which I believe you pointed out on numerous occasions which was only about 2 years ago. I suspect that his heart of hearts detests every single one of the facilities that he has seen to implementing up and running. His commitment to them should be the surest sign of how necessary they are and how dangerous the situation.
You are phrasing your argument better and better. You are the one who is doing the right nothing Mr. H. You are taking a look at the what is now without projecting your own economic “Truths” from yesterday.This has happened so fast in real time that theories that were argued were tested real time. Powell may have been avoiding the kind of supply chain disruption that would affect food and infrastructure. Winter no less.
Let us not kid ourselves. This has shown the system for what it has become. Built in tax system of rentier crony capitalism via Fed policy. If Americans are OK with that, fine. But it should be understood and explained for what has now been brought to a clear view. So yes, many economists are acting in bad faith because they think they own the truth. Being blind is not the same as taking in the view {doing nothing}
The lesson should not be my old truths hold. It is different now. The gold standard is over. Zero sum thinking must end.
I mean, I hope everyone understands how easy it would be for me to come on here everyday and write articles about how “crazy” it is that the Fed is doing this, or funding that, or buying this, etc. etc.
That is the cheapest of cheap financial content and nobody should take it seriously. I could churn out 25 articles like that every day without even thinking about it. That kind of stuff has been polluting the debate for a decade, and for what? Certainly not for everyday Joe to do any better, that’s for sure. And I can guarantee you that for all that kind of ominous rhetoric about “moral hazard,” all of the people writing it have been long everything for a long time, otherwise they’d have no clients left.
My whole thing is like: “Let’s have an intelligent discussion.” Let’s not just read the same narrative every, single day forever.
Thank you for the effort sir. At this point in our history I view your effort as being patriotic and appreciated.
“Lets not just read the same narrative every, single day forever”. Exactly why there’s 8,654 of us here H, there’s obviously an appetite out there for a quality alternative…that also happens to be unmatched in my opinion. Time and effort is much appreciated.
Thank you–this particular article is one of the best you have written in my time reading your stuff. It’s very accessible, and is calling out things that need to be called out..
Thank you salute
The problem is always how to make it happen. Human social systems are hard to change because they ultimately evolve to be controlled by the people that benefit. There are very few saints at the top who will sacrifice their good fortune and power to benefit others. Gun background checks are a less complex example that demonstrates the same principles. The vast majority of the voting US population want them but the powers that be aren’t delivering as they don’t see it in their interest. I’m fairly certain that this is the opposite of what the framers of the constitution had in mind. If MMT means a more equitable distribution of wealth, the wealthy 10% that also have the power are not going to be agents of change because they are mostly zero sum thinkers. We’ve been working on race relations for 400 years and still haven’t gotten many of the basic changes in place that we know are necessary. Bottom line, the high stakes game of chance known as the market may well continue flat or up as long as there isn’t something better for those that can afford to gamble.
I agree “human social systems are hard to change”. Often it takes a revolution or a war. The world is certainly on the brink of something. H summed up the situation above “When the pandemic hit, it disproportionately affected those in low-paying jobs. It hit minority communities hardest. It further exposed the nation’s broken healthcare system. It pushed America to the brink, and the death of George Floyd shoved the country over the edge.” People are scared and desperate, they are looking for a way out. Hopefully our govmt will provide a peaceful solution but i am not holding my breath.
…and thats why i subscribed.
Another great article.
This is asinine. The fed is just as complicit as El-Erian, Minerd, and anyone else you care to name.
You say the fed used the tools it had available but the fed used tools it did not have available as well.
Any tool the fed could have dreamed (including the one you so elegantly point out) was at their disposal at the height of the crisis. No politician, elected or appointed, would have denied them.
They went back to the well instead.
Do you suppose it’s because Powell and company have no imagination, or maybe because they don’t want to?
The last two days have brought a number of calls from friends who are not active in the markets but know of my involvement. The substance of each call involves anger over the market – the endless rallies in the face of their personal pain and fear for the future. I fear that at some point, this will be the mantra of the people and the popular press. And the Fed and the “wealthy” will be in their gun sights. Sometimes, the disconnect becomes the “catylyst”.
You go TRH! Clarity refuting half truths… Getting better and better with time. Thanks.
If the Federal government has to financially bail out the states that spent more than they collected- kind of calls into question why states even bother to collect taxes. Citizens could elect politicians to set the spending side of the state budget and then just have the Federal government fund all states.
(haha)
Although we gnash our teeth, corporate bondholders have been given the largest Mulligan in perhaps world financial history. But it had to be done as the alternatives are worse. Do we really want states defaulting on pension obligations? Or having to abandon necessary capital projects as the funding stream (i.e. a state gasoline tax) be abandoned? Letting state Medicaid programs go bankrupt? Less income, more job losses, and fewer services at a time of greater need do not seem like a good way to go right now. The same moral hazard problem that we complain about private bondholders would actually be less an issue if the Feds were to assume state and municipal debt. Special bonds and special Fed buying facilities could be created to quarantine the debt and permit the programs to be unwound if ever the day that it would become possible to do so.
For me the problem is not providing one time financial assistance to over-extended States related to covid costs and revenue hits, but rather the prescient we set if the Fed provides financial support for all manner of underfunded State programs. That is tantamount to giving States the green light for unchecked future spending as someone (the Fed) will always have their back. Totally unsustainable. It would unleash a competition by States to match the highest per capita spending… and why not? It removes the negative consequence feedback loop that limits over-promising.
But you do not have a problem with the Fed guaranteeing unlimited assistance to the “private” bond market? Why does “whatever it takes stop” at a PO Box in Delaware? Is the moral hazard problem different for state and local leaders than for corporations and investors? (And look at everyone taking on leverage –to do what? Front run the Fed)
Who is the largest employer in states? –far and away state and local governments. Who has the largest pension obligations? The most “safety net” obligations?
The Fed buying equities seems to be a viable proposal but as soon as you talk about bailing out “governments” it becomes unthinkable. Why is that?
What is going to happen when foreclosures start and commercial properties continue to stop performing? Is the Fed going to assume the worthless mortgage and continue to pay the property taxes as if nothing has changed? If not, who or what is going to replace the lost property tax revenue? States rely heavily upon excise taxes –and state budgets project revenue growth not just a steady state let alone a decline. Free money for corporations so its workers can come how to a community devoid schools, public safety officials and passable roads with working lights? Doesn’t make a whole lot of sense to me.
If the last 12 years has taught us nothing it is that the Fed believes we can never ever have a recession again. And now we have one because the Fed is not omniscient or omnipotent. Exogenous shocks happen and will happen again. The problem with GFC and the response is that that our economy cannot even tolerate a mild recession and so it is not a symmetrical choice between either an unprecedented recovery or a Depression –any prolonged downtown turn of even the mildest form will ignite a positive feedback loop that will require more and more debt to climb out of. And that will constrain future growth. We will be lucky if it is a lost decade followed by secular stagnation.
There is much debate about the benefits of QE, “emergency measures” etc. Many think they were a serious mistake. I believe they were the only credible option but it is important to remember that it is not a panacea or even a cure. Fed intervention is a therapeutic. When the Fed administers it, the patient is very very ill. Between the side effects of the therapy and the underlying condition of the patient, the recovery will be slow and incomplete. Disability rather than death is far and away the most frequent outcome of a trauma. We should insure ourselves accordingly.
I am very pleased to be a reader of this site. It has helped me see the world more clearly. I do appreciate the incredible effort you put into this work.
I will simply state that change occurs when the people who can enact that change are seriously hurt by the current situation. The “Austrian cure”–true capitalism for all, might well kill the patient. But on the other side, lies a lot more potential for a much fairer world as the wealthy have to react to a completely new dynamic (either a complete asset reset as mentioned or a revolution).
Rabobank was generous in their assessment. There is no “Austrian cure”. Austrian economics is a joke beyond its initial contributions. We got what we needed from it a long time ago and since then, it’s devolved into something that shouldn’t be taken seriously by anyone, anywhere. It’s not even really economics. It has no place in any academic institution and should be banished to the dustbin of history.
Just one man’s opinion. lol
As the debt load for a lot of countries rises to levels with so many zeroes that repayment is impossible, with economies in shambles, demonstrations and a pandemic at hand, I don’t have a clue as to what the answer is to “Where do we go from here?” I do see the humour though.
I have been trying like hell to believe all that is now occuring. Wampum or gold were the currencies of North America at one time. Gold is a hard money theory, wampum was a fiat currency. Politics determined which money predominated. They both worked. The body politics can use any money to facilitate an economy. It has intellectual ramification that now should be thought through before using the old tropes.
Gold is only valuable when people think it is. It, too is “fiat” currency. Try to buy a six-pack with gold.
Excellent article, truly. It’s absolutely right to suggest that this is not the time to talk about a trigger-happy Fed. That time was last year.
H, great stuff. I don’t know how you pump out so much quality content on a daily basis.
How’s your health holding up these days?
I agree that the Fed has a limited toolbox and that a fiscal response would have been much better to an extended monetary response during the GFC. Also the Fed had to open the taps on the repo market during the pandemic because the world depends on dollars. However the Fed did NOT have to buy junk bonds and with a coordinated response with the Treasury could have had the companies with a solid business but too much debt (Boeing, Delta, Ford, etc.) go through a controlled Chapter 11 to preserve the jobs and the vital industry while trimming the debt load (equity holders get wiped out and bond holders become the new equity holders). Or the government could have become the new equity holder and given the equity to people through Social Security or similar. But the present situation just makes the situation worse at a time when we have no real leadership.