‘Capitalism Was Lost Long Before COVID-19’
Earlier this week, in the course of summarizing the main points from the latest missive by SocGen's incorrigible (yet exceedingly affable) bear, Albert Edwards, I mentioned that my own view of the Fed's foray into corporate bond purchases is relatively sanguine.
It's not that I don't appreciate the moral hazard critique. Rather, it's that the genie left the bottle some years ago.
When the Fed cut rates to zero and embarked on what, in the pre-COVID world, counted as "large-scale" asset purchas
OK ,,,,, so now we have determined the Pendulum is swinging ( like I assumed all along ) This is a good post , by the way , but the question becomes does anything ever revert to a norm or do we venture into the deep blue sea of a new (perhaps tragic ) adventure…I’m game don’t know about everyone else though ….!!!
If you believe in the Law of Entropy, then the place we will land with our swinging pendulum is a homogeneous world characterized by total chaos.
Your article was very thoughtful. I thinking that real problem is the philosophy that Powell is going by. In order for him to get the job he has to say that he will do anything necessary to support the economy. He is doing what he said he would do, but that is the problem.
The issue is Keyes is wrong about how money and credit work. We are supposed to live in a capitalistic economy. We haven’t lived in a capitalistic society since 2008, some would say 1913 , but I don’t think that.
The Federal Reserve is supposed to stabilize the economy but in raising the debt level as high as it has it has reached a point of insanity. The government is directly funding zombie companies to keep them a float.
I am glad you address this in many of your articles.
So how DID we get here? Greenspan started this low-interest rate regime with his series of insurance cuts from 2001-2004, which overheated the economy and led to the housing boom / bust. That jibes with the chart above – it was then that the zombie curve really takes off. And since the Great Financial Crisis, central bankers will (understandably) do anything to prevent a depression. So it seems to me that we can lay this at the feet of “the Maestro”. And Bernanke’s QE, the ultimate financial can-kicking mechanism, saved the day in the short run but caused much economic dislocation and inefficiencies in the long run…
Recall also the events of 9/11, which deepened an existing recession, and prompted a Fed response. While the US came out of that recession relatively quickly, our response to 9/11 included two very expensive wars. This increased public debt tremendously, directly affecting monetary and fiscal policy. The rising debt affected the willingness of congress to use fiscal policies to address the GFC, helping to push us into the monetary regime that ensued, and which continues today.
There is no free lucnh
Remember the Walter Bagehot dictum “lend freely, at a penalty rate, against good collateral.” The Fed has gone astray. Fiscal authorities, duly elected representatives, are charged with the responsibility of picking winners and losers. That is not the role of a central bank. But that is what they are doing when they backstop IG and HY, True, the moral hazard ship sailed long ago, but this intervention is something that is at another level of intervention. Capitalism only works if there are winners and losers. We have to clear out the dead wood in order for profitability to be restored which drives investment and ultimately innovation and growth. The Fed is making a mistake that offers short term benefits but long term costs.
We also have to dust off our anti-trust tools and start using them with vigor. It’s been more than a centurysince we’ve seen this level of monopolistic power in the U.S. economy.
check!
Obviously, we can’t know what the Fed would have done if this had been a “typical” downturn, but if someone invented a counterfactual machine, I’d love to see how long it would’ve taken for the bull market to end and to what levels the Fed would have gone to save zombie companies in that situation. In a way, the Fed has been saved from much harsher criticism by the pandemic (at least for now).
Now if the Fed’s actions end up creating so much wealth inequality (and making it clear deficits don’t matter on their own) that it finally spurs action in the US to create a stronger social safety net, then maybe it’ll all have been for the better (the Fed’s actions, not the pandemic).
Eroded safety net- leads to recessions hurting too many by too much. Leads to unwillingness to inflict occassional pain on society of a recession. Leads to bigger bailouts and very supportive monetary policy anyway. We need, higher minimum wage- and some subsidy for lower wage workers. Universal child and health care not linked to employment. Higher levels in social goods- public health, education, infrastructure. Further support to social security and medicare trust funds. Cost is a income proportional or progressive value added tax and somewhat higher corporate tax rate. Cost of not doing this- priceless!