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How 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

• stefano 7y ago
  I guess the idea is to keep companies solvent so they'll still be there when the quarantine restrictions are lifted.
  • alexmingoia 7y ago
    Why 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 ago
      Because: 1. Nobody would buy them. 2. Small biz doesn't have access to corporate paper markets, even in the best of times.
      • matthewdgreen 7y ago
        How 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 ago
          The Fed is set to announce small business loans very soon. This is just part of a larger plan.
          • im3w1l 7y ago
            I'm really curious how startups are positioning themselves for the availability of such loans. Might the terms be so favorable that it drives out the VCs?
            • thoughtstheseus 7y ago
              Unlikely. Even in these troubling times the fed likes to have assets backing loans. Maybe an SBA program could be competitive but not in the near term.
        • dredmorbius 7y ago
          Indirectly, by avoiding a liquidity crunch. Specific direct aid is called fiscal policy, and would have to be enacted by Congress (or possibly to a limited extent by the executive): reduced taxes, direct payments or credits, loan guarantees, government spending, other economic policy. The Fed's tools are monetary policy, and manipulate the overall money supply. That's a powerful, but limited, power.
      • icelancer 7y ago
        >> 1. Nobody would buy them. Sure they would. If you price it correctly. >> 2. Small biz doesn't have access to corporate paper markets, even in the best of times. Not true. I am a SMB owner and have secured a LOC for my business as well as refinancing of my house personally. It's out there. Just at prices you might not like. But then again, we aren't guaranteed good prices. Or at least, we shouldn't be.
    • take_a_breath 7y ago
      If companies don’t have customers, as you noted in your prior comment, how will they secure debt financing at a reasonable rate?
      • OscarCunningham 7y ago
        Because the lenders know that they will be profitable after the virus has passed.
        • whatshisface 7y ago
          I'm not sure if I agree. Restaurants are low margin businesses to begin with and they might not be able to sustain a high interest loan even in the best of times.
    • nemo44x 7y ago
      Have you looked at the credit market this month? It’s in shambles as yields are soaring. It’s not that higher yields is bad. But moving so quickly is dangerous. Bonds, etc are necessary to maintain supply lines, pay people, etc.
      • xiphias2 7y ago
        Where are yields soaring? Here it looks like they are going down: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i... It wouldn't surprise me if the 80 year bond bubble popped this year, but I don't see that happening yet.
        • thoughtstheseus 7y ago
          Corporate bonds.
        • nemo44x 7y ago
          The same reason mortgage rates are up even as treasuries are at an all time low. Who wants to loan money in this environment? Have you looked at BBB bonds? A lot of companies have been downgraded because the conditions have changed so dramatically, driving yields up as well.
          • xiphias2 7y ago
            I see, thanks! When do you think it will translate to treasury bonds crashing? I can't imagine them having 5 more years, but on the short term they can easily go to negative yields.
      • jrumbut 7y ago
        An environment of high yields should be the reward for people who made hay while the sun shined. If we're gonna have socialism, let's have socialism for the poor and capitalism for the rich and not the other way around.
    • OscarCunningham 7y ago
      > Why can’t they survive by issuing corporate bonds? The purpose of the Fed policy is to make coporate bonds (and other lending/borrowing) more attractive.
• chasd00 7y ago
  I bet lenders are getting nervous wondering if they're going to get their money back. "when you owe the bank $10k you have a problem, when you owe the bank $10B the bank has a problem".
• paganel 7y ago
  > How does injecting money solve a problem that’s not caused by lack of money? Not an expert on this but decreased money velocity (the thing we witness right now) can be seen from the outside in fact as "lack of money".
  • SilasX 7y ago
    If low V is due to businesses not being able to get loans when they're sound, sure, that could be called a problem of lack of money. If low V is due to exogenous factors -- like a virus making their products ultra-low-demand -- then no, that's not a problem of lack of money.
• CyanLite4 7y ago
  It stops the stock market slide. Which is more valuable than political talking points. Eventually these bankers are going to start doing some math and see that with 0% interest rates and unlimited firepower on Treasuries, there’s going to be massive pent up demand after this medical crisis is solved. Money will be lent to everyone, including airlines and leisure companies because there’s simply no where else to put their money. Inflation be damned. Market is always looking 6+ months ahead. And the moment bankers see a light at the end of the tunnel, this thing is going to take off like a rocket ship.
  • matthewdgreen 7y ago
    I think it's just as likely that the markets will simply stop performing any sort of useful price discovery function, leading to huge misallocations of productive resources -- resources we desperately need right now.
    • resters 7y ago
      This is actually the goal, to prevent price discovery and to make it less likely that the political system would require firms to use adequately cautious levels of underwriting capital. The perverse incentive for firms is that the more accurately they structure their financials to be highly vulnerable to systemic risk, the more likely it will be that the decision to do so will be rewarded by policymakers. Simply put, capitalism isn't capitalism without firm failure and an very clear winners and losers when unexpected events occur. The US economy, which people think is capitalism, is nearly as nationalized and intertwined with government capital as China's economy. In my view, if we're not going to have capitalism, then we should have a system that is significantly more fair and generous to those in need. If average peoples' life savings are at risk, so too should be banker and executive bonuses (and even jobs). One can only imagine how much stronger the US economy would be today if the 2008 crisis had led to the smart decision makers being rewarded and the stupid ones being bankrupt. Instead, we had the opposite situation, where the stupid investors got bailed out and the smart ones had their well deserve gains slashed by government policy.
      • 7y ago
• dredmorbius 7y ago
  The problem isn't caused by a lack of money, but it's creating one, which exacerbates the crisis.
• chrshawkes 7y ago
  There are certainly money problems as we speak. Millions have already lost their jobs.
• tonyhb 7y ago
  Current problem is that money right now will be evaporating when loans default. The financial system is built on itself so that loans create money. It does not expect to come to a grinding halt. If it does, loans aren't repaid, and money literally disappears. Deleveraging occurs. Wealth disappears. I think the aim is that we don't lose money from defaults over the short term.
  • naringas 7y ago
    but isn't loans defaulting (risk) the original reason for having interest?
    • dillonmckay 7y ago
      Yes.
      • samsonradu 7y ago
        And that’s why it’s so close to zero - because there’s the gov/fed safety net.
  • resters 7y ago
    Issuing loans is risky, and the price of borrowing should reflect actual risk. The US economy is moving to a more and more highly leveraged scenario where all firms avoid worrying about systemic risk because it's profitable to do so since they know they will be bailed out when the inevitable occurs.
  • TheBobinator 7y ago
    If the government wanted to so decree, they could decree banks could not forclose on bankrupt customers and must restructure loans. They've already done that for rent and mortgage agreements in many areas where people are hard hit by this. That would stop the loss of money right there. The market is demanding liquidity to be able to manuver an uncertain future; this has caused an effective collapse of the credit market due to demand. Much like there's no TP on the shelf, there's no credit on the shelf; the fed however can print a lot of money if it wants to which ironically enough, can then be invested to print TP. If everyone has cash in the bank account, they feel secure, and that in of itself will stop the stock market from collapsing further. The way they avoid inflation is by providing loans at a rate under the rate of inflation; free money, but it has to be paid back and over a reasonable term. This will expand the amount of money in the economy for a time. History will remember this as is a perfect storm; the medical industry has been a tremendous burden on government and employers backs in the form of an unscrupulous blackbox of spend. A couple million deaths especially of elderly patients is going to upend the medical industries cash cow and at the same time force a hard look at what the industry is doing to be prepared for pandemics like this one. If you have cash going into this downturn, now's the time to start plotting where you are going to invest it for maximal gains.
• skybrian 7y ago
  There actually is a lack of money because the usual lenders got scared. Also, there is no situation so bad that it can't be made worse, and companies laying people off makes it worse. There are bills to pay and people still need to buy food.
• alpineidyll3 7y ago
  The credit crisis just beginning is what locks in a protracted difficult recovery. As you can see though the market agrees with you.
• gridlockd 7y ago
  > This market downturn isn’t a lack of liquidity, or a lack of money, or toxic assets like the mortgage backed securities. There absolutely is a lack of liquidity, that's why you see all these stock sales. To name just one example, lots of companies have been buying back stock on margin because of extremely cheap loans. That stock is now worth far less, the loans keep maturing, new loans are harder to get and more expensive. So how do you raise cash? Sell stock. The cycle continues. How did we get there? Not being over-leveraged in times of cheap money is a competitive disadvantage. > People aren’t going to stores, restaurants, and airlines because of SARS-CoV-2, not a lack of credit or money. They are also not going to work in many cases, supply chains have been disrupted, production has been slowed. That's a lot of income that has either disappeared or been put into question. That income is supposed to turn into spending, that spending is supposed to be someone else's income. It's a vicious circle. The problem isn't so much what people are doing now, but what they're (not) going to be doing months down the line, and the uncertainty surrounding that. > Printing money isn’t going to create customers for businesses effected by this pandemic. Pretty much every business is affected by this pandemic. Without injecting liquidity, a massive wave of bankruptcies is going to follow suit in short order and the whole economy is going to go tits up. You can argue that liquidity shouldn't have been injected in the past years during "the greatest economy of all times", but that milk has been spilled.
• sershe 7y ago
  People aren't not going to stores, etc. because of the virus. In WA this weekend, with lockdown theater in full force, there were tons of groups eating outside restaurants on benches and grass out of takeout containers, hiking trailheads were overflowing with cars, running in a city park near my house was impossible because of the crowds (larger than on a regular sunny weekend). It was really inspiring to see (from a position of a person who absolutely disagrees with lockdowns, even if the worst case exponential spread was the alternative). Imagine what the economic impact of the virus alone would be if there weren't lockdown pleas all over the news, social media, even highway signs. It would be close to zero now, and if Spanish Flu teaches us anything it would be negligible even at the peak. So, the government is killing the economy. Hence, the government is also trying to prop it up. I suspect it won't end well either way.