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Federal Reserve pledges asset purchases with no limit to support markets
- meddlepal 7y agoLet's add another floor to the house of cards!
- chadmeister 7y agoAwful policy. The fed needed to hold off on this and the previous rate cut until Congress finally passed a useful bill. Powell had all the power to force Congress to act and he's blown it again.
- lukas099 7y agoThe Fed's job is to keep the value of currency steady and support full employment, not to play games with Congress.
- hnaccy 7y agoHow can the Fed support full employment if governments are forcing people to stay inside and business to close?
- OscarCunningham 7y agoBy making lending to the closed businesses so attractive that they can stay open over the course of the quarantine. (Likewise people can stay fed.)
- onlyrealcuzzo 7y agoBut that's not what this is doing at all. This is keeping existing corporate debt artificially priced. Unless they lower rates to negative, new debt isn't getting any cheaper.
- onlyrealcuzzo 7y agoThe dollar index is well within its normal range. No amount of buying corporate debt will keep people employed. This is to artificially reflate asset prices.
- dageshi 7y agoIf the fed plays politics, the politicians will play politics back, but harder.
- elamje 7y agoWrote a thread about a different perspective of the Fed. I want to gently suggest that your concept of what the Fed is, is not correct. It’s complex, and a very unique government/private entity, but it certainly is explicitly not supposed to respond to any sort of political influence. https://mobile.twitter.com/elamje/status/1242129602040008704 https://mobile.twitter.com/elamje/status/1242129602040008704
- athaht 7y agoHope this works
- enlyth 7y agoUnlimited money cheat activated
- koolba 7y agoSo the Federal Reserve is admitting to a Martingale strategy. Interestingly they’re the one entity on the planet that can pull it off at scale. https://en.wikipedia.org/wiki/Martingale_(betting_system) https://en.wikipedia.org/wiki/Martingale_(betting_system)
- jdpigeon 7y agoshudder
- resters 7y agoIt's not going to work much longer. We've already seen the Fed make moves that are significantly beyond what it did in 2008, and since 2008 firms have been aware this would happen and have been less risk-averse as a result. Creative destruction is nearly absent as an engine for growth in the US economy, and we are all suffering from the lack of innovation that would otherwise occur.
- jkhdigital 7y agoHadn't seen this language used to describe the everything bubble, but it fits. There's no gambler's ruin when you have an infinite supply of money.
- alexmingoia 7y agoHow does injecting money solve a problem that’s not caused by lack of money? This market downturn isn’t a lack of liquidity, or a lack of money, or toxic assets like the mortgage backed securities. People aren’t going to stores, restaurants, and airlines because of SARS-CoV-2, not a lack of credit or money. Printing money isn’t going to create customers for businesses effected by this pandemic.
- stefano 7y agoI guess the idea is to keep companies solvent so they'll still be there when the quarantine restrictions are lifted.
- alexmingoia 7y agoWhy can’t they survive by issuing corporate bonds? And as far as I know this Fed policy isn’t to buy failing stock it’s to inject cash overall through treasury bonds, since the Fed isn’t allowed to buy stock.
- dredmorbius 7y agoBecause: 1. Nobody would buy them. 2. Small biz doesn't have access to corporate paper markets, even in the best of times.
- matthewdgreen 7y agoHow does the current Fed strategy help small business right now? If anything, it seems like this strategy will leave larger companies in a position to soak up those small businesses' market share when this is all over.
- Anon1096 7y agoThe Fed is set to announce small business loans very soon. This is just part of a larger plan.
- ohiovr 7y agoIs the fed going to buy up the BBB- debt from firms about to be downgraded?
- brenden2 7y agoKeep in mind they're only able to buy US treasuries and mortgage backed securities. If Congress changes the rules to allow the Fed to purchase stocks, we'll be in for some very interesting times. It could be that we get an economy of zombie companies, or valuations soar beyond what we've come to expect as normal. In any case, this is unprecedented and in my opinion not the right move. They're sacrificing our future in order to inflate stock prices now so that the current president can get re-elected.
- nabla9 7y ago> or valuations soar beyond Can you explain why you think Fed purchases would cause stock market soar instead of decline to slow down a little?
- dntbnmpls 7y ago> Keep in mind they're only able to buy US treasuries and mortgage backed securities. They announced they will buy municiple bonds also. https://www.cnbc.com/2020/03/20/the-federal-reserve-is-expanding-its-asset-purchases-to-include-municipal-bonds.html https://www.cnbc.com/2020/03/20/the-federal-reserve-is-expan... > If Congress changes the rules to allow the Fed to purchase stocks Corporate bonds first. If that fails, then stocks. Baby steps.
- deleted 7y ago[deleted]
- mrfusion 7y agoWhy didn’t congress have to approve the munis?
- thoughtstheseus 7y agoThey’re government securities.
- 12elephant 7y agoThey're already buying corporate bonds: https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200323b1.pdf https://www.federalreserve.gov/newsevents/pressreleases/file...
- CyanLite4 7y agoAbout friggin’ time...
- myth_drannon 7y agoI'm afraid this is another wealth grab similar to 2008 but x10 bigger. What was an international health emergency turned into another large scale robbery of the common folks.
- no_flags 7y agoCould you elaborate on how its a wealth grab?
- tonyhb 7y agoShort: There are money runs on funds causing liquidity issues. Funds sell assets to market makers for cash to give rich people their money. This causes a downwards spiral and asset prices plunge. Now, the fed will continue to buy assets (eg. but not limited to corporate bonds which have tanked and taken out a couple firms and MMs) so that rich people can liquidate their assets. We will be bag holders as the fed will own corporate bonds that – frankly – the existing financial system players expect to default. We take the hit and own junk so that wealthy people can extract money now. This is the high level to my knowledge. Please add more colour and correct me if there are things that I'm missing :)
- myth_drannon 7y agoLast week US Fed bailed out hedge funds that were highly leveraged. $1.5 trillion transfer to save high net worth individuals. https://www.bloomberg.com/news/articles/2020-03-19/before-fed-acted-leverage-burned-hedge-funds-in-treasury-trade https://www.bloomberg.com/news/articles/2020-03-19/before-fe...
- jdhn 7y agoThank you for posting this, it's both informative and highly infuriating
- eyeinthepyramid 7y agoThe $1.5 trillion was a fund of one day fully collateralized loans, of which only ~$100 billion was actually used. There was no wealth transfer, just the fed following its mandate to keep interest rates on short-term loans within an acceptable band. Here's the daily totals of repo loans: https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWMORE=TRUE&startDate=01/01/2000&enddate=01/01/2000 https://apps.newyorkfed.org/markets/autorates/tomo-results-d...
- eternalny1 7y agoI was watching the Dow futures. They literally went from -700 to +400 in 30 seconds.
- sokoloff 7y agoOpened -400 on the Dow anyway
- vsareto 7y agoThis feels like we're watching bitcoin.
- techdevangelist 7y agoAnd somehow the Dow opened lower still, it’s like lighting an unlimited pile of money on fire does nothing good, almost like there is a health crisis instead of a monetary one..
- laluser 7y agoThere's way less volume during this time.
- kragen 7y ago> Several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor.[9] The meeting included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin, head of the Chase National Bank; and Charles E. Mitchell, president of the National City Bank of New York. They chose Richard Whitney, vice president of the Exchange, to act on their behalf. > With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As traders watched, Whitney then placed similar bids on other "blue chip" stocks. The tactic was similar to one that had ended the Panic of 1907, and succeeded in halting the slide. The Dow Jones Industrial Average recovered, closing with it down only 6.38 points for the day. — https://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929 https://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
- jdpigeon 7y ago...On October 28, "Black Monday,"[10] more investors facing margin calls decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38.33 points, or 12.82%
- driverdan 7y agoThis is exactly how it should be done, by private industry and individuals, not the government.
- dredmorbius 7y agoAdditional coverage: https://www.washingtonpost.com/business/2020/03/23/fed-unlimited-credit-coronavirus/ https://www.washingtonpost.com/business/2020/03/23/fed-unlim... https://www.nytimes.com/2020/03/23/world/coronavirus-news.html https://www.nytimes.com/2020/03/23/world/coronavirus-news.ht... https://www.wsj.com/articles/federal-reserve-announces-major-expansion-of-market-supports-11584964844 https://www.wsj.com/articles/federal-reserve-announces-major... https://www.foxbusiness.com/business-leaders/fed-takes-action-provide-credit-consumers-businesses-coronavirus-economy https://www.foxbusiness.com/business-leaders/fed-takes-actio... https://www.ft.com/content/b71f0c32-6cfb-11ea-89df-41bea055720b https://www.ft.com/content/b71f0c32-6cfb-11ea-89df-41bea0557... https://www.theguardian.com/business/live/2020/mar/23/markets-slump-us-senate-covid-19-ftse-dax-shares-recession-stimulus-business-live https://www.theguardian.com/business/live/2020/mar/23/market... https://www.reuters.com/article/us-health-coronavirus-usa-fed/fed-mounts-aggressive-new-steps-to-combat-coronavirus-hit-to-economy-idUSKBN21A1U2 https://www.reuters.com/article/us-health-coronavirus-usa-fe... (Feel free to add others here.)
- deleted 7y ago[deleted]
- janandonly 7y agoThe USA just went Zimbabwe
- owenmarshall 7y agoAbsolutely terrible comparison. The Zimbabwean dollar is not the world's reserve currency. Zimbabwe cannot park a naval fleet off the coast of any country that tries to move away from the Zimbabwean dollar, or direct the worlds largest banks to freeze assets, or apply crushing economic sanctions. The US is probably the only country in the world that can print money without runaway inflation, and I don't doubt that we will maintain dollar hegemony with force if needed.
- whatshisface 7y agoYeah, the US is the only country in the world whose debt is dominated in its own currency. Want to sell me some goods and services in exchange for an IOU of one whathisface buck? Countries around the world have been answering "yes" for a century and now the inflation tax will be levied against everybody, not just Americans.
- stephen_g 7y agoNo it’s not... All Government bonds in my country are denominated in $AUD (by AOFM policy). Japan’s are in Yen. The UK’s is in pounds, etc.
- stephen_g 7y agoThe US is absolutely not not the only country that can use monetary expansion without causing excess inflation. Basically any country with its own central bank, fully flexible exchange rates, with all Government bonds denominated in its own currency, with a decently large and productive economy, and federal taxing and spending can do it. There are at least several who meet that criteria (even New Zealand, for example). Once you satisfy all that, high inflation just means you’re either spending too much, or not taxing enough. A big part of what happened in Zimbabwe, by the way, was that land reforms caused a massive collapse in food production (a major part of their economy) and unemployment skyrocketed. They spent a lot in response (also having foreign denominated debt I believe), but mostly not focused on policy that would increase capacity. At the same time, they were having to spend much of their foreign reserves on food because of the supply collapse. So the spending and hyperinflation were inevitably consequences of previous mismanagement.
- fallingfrog 7y agoIf a meteor was headed for the earth tomorrow, the president would get up in front of the nation and say, “my fellow Americans, we have created 100 trillion dollars of imaginary money in a database in upper Manhattan, so everything will be fine..”
- psim1 7y agoSo: my investments remain in very bad shape, inflation skyrockets, meaning my current net worth as well as future earnings are far lower. What does this help someone in personal terms?
- OscarCunningham 7y agoMarket inflation expectations are currently below the Fed's 2% target.
- marcrosoft 7y agoNot for long.
- OscarCunningham 7y agoWhat makes you think that? People said similar things in late 2008 when the Fed greatly expanded its balance sheet, and then inflation went negative for the next year.
- lifty 7y agoThere was great inflation in financial assets, for the whole decade leading up to the current crisis. So there is a good chance the same thing will happen again, now that the central banks have taken the big guns out. I keep hearing that the FED (and other CBs) our out of bullets, but I think they have unlimited bullets. If you inject enough liquidity even a dead horse will bounce back; and for an example of that, you can check out the Venezuelan stock market (https://tradingeconomics.com/venezuela/stock-market https://tradingeconomics.com/venezuela/stock-market).
- OscarCunningham 7y agoSo you're making the opposite prediction to the person I originally replied to? Investments will gain value faster than the cost of living?
- objektif 7y agoHow do libertarians feel about such government interventions, fiscal and monetary both?
- chrisjarvis 7y agoSpend 11 years buying back stock instead of saving anything then immediately bailed out at first sign of trouble. Private profit, public risk. 'Tis lame.
- deleted 7y ago[deleted]
- burroisolator 7y agoI fail to understand why any economist would prefer QE over helicopter money. Give everyone a check. If they need it to purchase everyday goods and services, great. If their everyday needs are fulfilled already, they will invest that money into stocks, bonds, treasuries, etc, adding the needed liquidity to the market. I understand if you're against the idea of giving people money. But this is just giving money to mostly the rich. Neo-trickle down economics.
- brenden2 7y agoThis is about making sure rich people don't lose money. It's not about helping people at the bottom.
- nocorpwelfare 7y agoAnd that, most of all, is what needs to stop.
- OscarCunningham 7y agoI asked a similar question in a similar thread recently. The answer that made the most sense was that the Fed feared future inflation. If you've done QE then you can just sell the stocks again when you want to limit inflation. But if you've done helicopter money then you're stuck.
- stephen_g 7y agoThe Govermment has something called ‘taxation’ in case that happens.
- AnthonyMouse 7y agoReally, the Fed has something called "raise interest rates" in case that happens. Something they've been wanting to do since the housing crisis and the primary reason they can't is that there hasn't been enough inflation, and raising interest rates against low inflation causes deflation (which is very bad). Congress could do everybody a huge favor right now by printing quite a lot of money and handing it out. Which would address the deflationary forces created by the demand destruction of the coronavirus in the short term and allow the Fed to actually raise interest rates after the pandemic is over.
- glass_of_water 7y agoHow does the fed determine which corporate bonds to buy and how much it's willing to pay for those bonds?
- deleted 7y ago[deleted]
- aazaa 7y ago> The Fed will be moving for the first time into corporate bonds, purchasing the investment-grade securities in primary and secondary markets and through exchange-traded funds. The only step remaining is for the Fed to begin buying stocks. The Bank of Japan has been doing this (by buying ETFs) for some time now. That bank now owns ~80% of the Japanese ETF market.
- rkx1 7y agoCan anyone with a better economic understanding share their thoughts on how viable this is? From a layman's point of view, it seems like the FED are using up a lot of their arsenal very quickly.
- deleted 7y ago[deleted]
- Anon1096 7y agoThe only action from the Fed "arsenal" that is used up is lowering the Fed funds rate. And even then, going negative is an option. The Fed still has numerous things it can do, including helicopter money, massive expansion of QE, buying new types of assets like stock, and making loans to non-bank businesses.
- Danieru 7y agoLots of voices missing the mark: the fed is acting to keep the corporate bond market from seizing up. Corporations finance part of their borrowings through bonds. These bonds need to be paid in full + the interest when the bond matures. Corporations and banks typically repay some of these from cash, and some by issuing new bonds. Right now no one is getting to issue new bonds at all. Banks cannot lend because the risk rating on these bonds has gone up, meaning they in-fact need to sell said bonds to reduce their risk exposure. Thus the FED is acting as a lender of last resort directly to major corporations. Without this last resort said corporations would need to either fire-sale off assets to pay the principle on these bonds or face a technical default. Covenants on their other bonds mean that if the corporation defaults on any of their bonds, all of the bonds become callable. It is 110% not good to have any major corporation go into a technical default. We are talking about companies which have plenty of assets and strong businesses. Thus the Fed and US Government are/should be acting to avoid any such rapid deleverage. It took Japan 2 decades to reduce leverage in the corporations. Without intervention the US could undergo this same deleveraging in a matter of months. It would throw the American people into such a deep poverty the likes of which we've not seen since the great depression. Which is to say: these bailouts are going to happen. No one who understands what is at stack would choose to "let the house fall".
- thoughtstheseus 7y agoAgreed, deleveraging fast is dangerous. That said if any large company gave themselves less than six months to refinance that’s on them. Everyone knows markets can become dislocated and closed for periods.
- derefr 7y ago> It is 110% not good to have any major corporation go into a technical default. Q: rather than going into debt, would it be possible for the government to just... suspend the activation of financial covenants generally for a while? Enact a law putting a temporary patch on how contract law works vis-a-vis financial instruments? Something like... any covenant with triggers written after date X would now be required to be written to include additional language Y; and any covenant triggers written before date X would be implicitly interpreted as if they did contain language Y. Language Y specifies that the activation of the covenant is suspended when the government says a certain named financial-market state "Z" pertains; and, when state "Z" is declared as having ended, only then would the covenant be evaluated for activation, based on the present state of the debtor, rather than its state during the historical period during condition "Z". Effectively, the covenant wouldn't be able to "see into" whatever happened during "Z" to apply its triggering logic to it. (I'm picturing here how you can, in an RDBMS, create constraints that don't validate until a transaction is complete, such that you can temporarily put a table into a constraint-violating state during the TX, and—as long as you fix things before the end of the TX—everything will be fine, and the trigger won't run.)
- JackMcMack 7y agoI'm reminded of this story of the Federal Reserve on 9/11: https://www.dailykos.com/stories/2014/09/10/1328813/-The-Astonishing-Story-of-the-Federal-Reserve-on-9-11 https://www.dailykos.com/stories/2014/09/10/1328813/-The-Ast...
- throwawayForMe2 7y agoI worked for the FRBNY for 24 years. They always took disaster recovery and business continuity very seriously. We planned (and practiced several times a year) for NYC to be gone, the northeast to be gone, and for the whole east coast to be gone.
- thoughtstheseus 7y agoLook out for TLTROs and dual interest rate policies next.
- stevespang 7y agoUS Dollars printing presses are all running at FULL STEAM AHEAD - - 24 /7/365, diluting the value of all dollars we already are holding.
- api 7y agoA major change that's gone at least partly unreported: since 2008 we have made the final steps toward a fully backstopped market. The market before was always somewhat backstopped, but now I think it's safe to say that everything big is backstopped. That means we've moved toward a financial system with one single point of failure at the top. It's got quite a lot of mass and weight, but if it fails everything else does. This is not dissimilar from the Chinese model, which means America is now (perhaps unintentionally) copying China. This also means short sellers should beware: even if you are nominally correct, the market may defy your logic because something else is backstopping everything.
- djohnston 7y agoIt seems like at some point you have to let a wound bleed. If we keep bailing out bad investments every black swan event, you're never allowing for a correction. Eventually the accumulated amount of bad business would be too much for the gov't to save. To borrow from biology, it seems like we're constantly interfering in the process of autophagy. Unfortunately there's no political capital to be saved with such a decision.
- fallingfrog 7y agoAfter the crisis is over, they’ll just do the same thing again, inflate a new bubble, faster this time, which will once again explode, and bail it out again on the backs of working Americans. There’s no learning curve at all. They think the problem is that they didn’t inflate the bubble fast enough and with enough leverage. But, this is probably what we should expect. It’s a repeated pattern throughout history that when things go wrong, leaders usually don’t try new approaches- instead they just keep doubling down on what they were doing before, thinking that the problem was that they just need to do whatever they were doing before, but more. It takes a total collapse, historically, for true behavioral change to occur. The whole society, like a drug addict, has to hit rock bottom.
- AsyncAwait 7y agoI like how socialism's used to save capitalism, yet you'll still have people claiming capitalism its the only system that "works". Yes, it "works" because it has to, i.e. there's no defined scenario of it not working, apparently nor the Great Depression, nor 2008, nor measures like these still don't mean anything as far as it not working, so it works because it apparently never does not work, no matter what. P.S. I don't mean to claim capitalism 100% does not work and socialism does, merely that maybe we need a healthy mix of both?
- dollar 7y agoYou labor under the delusion that we have capitalism. We don't. We have socialism, and have for over 70 years.
- AsyncAwait 7y agoWe do indeed, but only for bailing out megacorporations.
- cs702 7y agoEvery decade or so, with regularity, the world seems to go through a significant economic or financial crisis triggered by some or other "unexpected" shock: * The current crisis, starting now, in 2020; * The global financial crisis from 2008 to the early 2010's; * The dotcom, telecom, and tech bust of the early 2000's; * The Asian debt crisis of the late 1990's; * The Latin America debt crisis of the 1980's; * The oil shock and stagflation crisis of the 1970's; In each of these crises, a significant swath -- or all -- of the world's financial infrastructure has seized up, requiring government intervention to prevent collapse. A natural question to ask is whether the financial infrastructure we have today has been well-engineered to be robust to these remarkably regular shocks. Judging by the regular seize-ups, it doesn't seem to be.
- js8 7y ago> A natural question to ask is whether the financial infrastructure we have today has been well-engineered to be robust to these remarkably regular shocks. Of course it isn't. If you go back in history even further, the pattern continues. That was the reason why Keynes' General Theory was developed. But people still refuse to believe that the instability is internal to the (capitalist) system. The economic theory needs to move away from equilibrium towards fully dynamic models, for example those that Steve Keen is developing.
- salawat 7y agoPeople are terrible at grokking cycles with periodicity greater than about 1/10th of their lifespan I've noticed. Something about the lure of "everything will be different" and subpar internalization of the lessons of the past just seems to end up causing unholy amounts of pain in the long run.
- kaffeemitsahne 7y agoIf there is government intervention every time, naturally there is no reason for anyone to implement robustness measures.
- helen___keller 7y agoI mean, actions by the Federal reserve and congress are both part of the system so it's a little unfair to say the system should work without government intervention. Particularly this time around, healthy and well run businesses following reasonable best practices are being decimated. And why shouldn't they? A large percentage of our economy was just shut off. Add in leverage - which isn't inherently a bad thing - and suddenly you have a recipe for disaster with a system wide increase in debtors needing to default. We need government intervention because the free market solution to half of businesses being forced to close, is for those businesses to go under and their employees to starve and their banks get squeezed and so on
- fallingfrog 7y ago”When there is pressure for leaders to respond to problems or crises, they often simply intensify their efforts in their particular defined sphere of activity – even if that’s not relevant to the real problem. To do otherwise requires taking on entrenched practices and asserting power in areas where it often will not be well received. And leaders tend to see major crises more as threats to their own position rather than as systemic challenges for the societies that they govern or the institutions that they manage. Frenzied grand constructions, wars and great rituals are among the common responses of ancient leaders to crises. These demonstrate powerful responses by the leaders (enhancing their threatened hold on power), but almost never really address the problems themselves. A cynic might characterize the giant U.S. stimulus bill of 2009 as such an effort.” -Arthur Demarest
- lend000 7y agoThis is a recipe for stagflation -- economic slowdown (inevitable, and by choice, in response to the circumstances) with excessive liquidity in the market. The capital injections aren't going to open up restaurants until shutdown orders have been lifted, and even then, you're kidding if you think small businesses will materially benefit from Fed actions.
- ijidak 7y agoThis warning is from the Bible, written well over 2,000 years ago. "Woe to him who accumulates what is not his—For how long?—And who makes even greater his own debt! Will not your creditors rise up suddenly? They will wake up and violently shake you, And you will become something for them to plunder" Habakuk 2:6,7 Every financial crisis in recent memory is caused by excessive debt by some party. - Consumers - Homeowners - Financial institutions - Corporate institutions - Governments It's stunning how poorly this problem of excessive reliance & use of debt has been tackled by governments and regulators. That, despite debt being well known as a source of financial meltdown for centuries! Even with all the research, regulations, and rules on the book, this well-known problem of recurring debt crises has remained unsolvable by world leaders. https://wol.jw.org/en/wol/d/r1/lp-e/101989322#h=8 https://wol.jw.org/en/wol/d/r1/lp-e/101989322#h=8
- pacamara619 7y agoHaha, money printer go brrr.