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> We are talking about companies which have plenty of assets and strong businesses. We are also talking about companies that are leveraged to the tits to juice

> We are talking about companies which have plenty of assets and strong businesses. We are also talking about companies that are leveraged to the tits to juice their return on equity. What is glossed over in all of these discussions about bailouts is that the managers of these corporations respond directly to financial incentives, and the existence of a "lender of last resort" such as the Fed ensures that corporations will tend to leverage their balance sheets far beyond a level commensurate with the actual risk of the underlying business. > We are talking about companies which have plenty of assets and strong businesses. Except that those assets are owned with borrowed money. Someone has to eat the losses, and in an actual free market there are two options: the equity holders, or the bondholders. Now, the Fed provides a third option: the holders of U.S. dollars, whose currency is devalued as money is printed to paper over the void which was opened up by the pandemic. And so the charade will continue.

jdkee 7y ago
"the existence of a "lender of last resort" such as the Fed " This. The moral hazard here is enormous. And why should the Fed serve the interests of equity owners over the national interest in a strong, reserve dollar?
- RealityVoid 7y ago
  My feeling is that the answer to this is because these companies (arguably) produce something of value to the world. Letting them become bankrupt would mean they do not produce that something of value so that would be bad economics. And a case of not seeing the forest for the trees. The role of economy is to sustain a certain confort to the population, an people should forget that at their own peril.
  - ahelwer 7y ago
    Bankruptcy doesn't mean the company's assets are thrown in the trash. It just means the current equity & bond holders get rinsed. Other presumably smarter people can then come in and run the company.
    - toomuchtodo 7y ago
      They mustn’t even be smarter, simply more ethical and responsible.
      - dragonwriter 7y ago
        They needn’t even be more ethical and responsible, either. Calvinist mythology aside, financial success isn't a symptom of moral virtue.
    - akiselev 7y ago
      Isn't the nature of a bankruptcy largely at the discretion of a judge?
tylerhou 7y ago
> Someone has to eat the losses, and in an actual free market there are two options: the equity holders, or the bondholders. The equity holders are eating the losses; have you seen the stock market? > Now, the Fed provides a third option: the holders of U.S. dollars, whose currency is devalued as money is printed to paper over the void which was opened up by the pandemic. And so the charade will continue. Money is being temporarily created and lent, in exchange for collateral (bonds) to avoid a lack of liquidity caused by decreasing asset values and more hesitant lenders. Once things go back to normal, the money will be destroyed since corporations will return the money in exchange for the asset again. The net currency devaluation is 0.
- Hokusai 7y ago
  > The equity holders are eating the losses; have you seen the stock market? This is a misconception. Loss or profit only happens when you sell your assets. Until then it is just economic potential. The trend of not paying dividends is at fault here. When you do not care about dividends but perceived future growth to earn money there is an incentive to over-commit and increase risk above any reasonable level. Adding to that, if someone's "investments" last just a few days or weeks. Then that person is not investing, that person is just speculating. And, speculators should not be shielded of market readjustments. If anything they should fully pay to use the market as a casino. But, back to the point, your assessment do not contradicts that companies are excessively leveraged and are not ready to survive though times. As the parent comment says, there is an incentive to leverage as much as possible and let the tax payers pay for the meltdown. "American Airlines spent $13 billion on share buybacks for 10 years through 2019". They should have used that money more wisely. Why should the taxpayers give money away or lent money at close to zero interest when the companies had the money and dedicated it to artificially increase share prices?
  - tylerhou 7y ago
    > Loss or profit only happens when you sell your assets. This is a meme phrase; losses absolutely do happen before you sell your assets. (If I bought Enron at $90 and never sold, I didn't lose any money, right?) > "American Airlines spent $13 billion on share buybacks for 10 years through 2019". They should have used that money more wisely. Why should the taxpayers give money away You have two misunderstandings here. The Fed is not bailing out American Airlines by giving money away. That has to go through Congress. (I have no claims about whether bailing out AA is a good decision or not). Bailouts also generally are not free giveaways; the government often takes equity stakes. > or lent money at close to zero interest The Fed is lending everyone money at 0% to avoid a recession. Regardless of whether AA previously bought back their stock, they could still borrow at 0%. The Fed is doing this because the alternative (letting everything crash) is much worse. > when the companies had the money and dedicated it to artificially increase share prices? Share buybacks do not "manipulate the market" (not your words, but common phrasing among anti-buyback advocates) and artificially increase share prices. They return capital to shareholders. The share price goes up because the stock now represents a better return on investment (when AA buys back stock, it no longer a bunch of market cap tied up in money uselessly sitting around in a money market account). When times get tough, AA can sell equity for more money, which is a stock buyback but in reverse. That's what could happen here. This ebb and flow (raising capital by issuing shares when you need it, returning capital when you don't) is the whole point of equity markets. See https://www.bloomberg.com/opinion/articles/2020-03-17/the-good-times-for-airlines-are-over https://www.bloomberg.com/opinion/articles/2020-03-17/the-go... for a more comprehensive argument about why share buybacks for airlines are more rational than holding money for a rainy day.
ForHackernews 7y ago
> the holders of U.S. dollars, whose currency is devalued as money is printed I know that's what the macroeconomics 101 textbook says, but is there any empirical evidence this actually drives higher inflation? We've had historically low inflation for over a decade now[0], a decade during which the Fed has undertaken successive rounds of QE to the tune of $40-$85 billion per month.[1] [0] https://www.usinflationcalculator.com/inflation/historical-inflation-rates/ https://www.usinflationcalculator.com/inflation/historical-i... [1] https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1,_QE2,_and_QE3 https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1,_QE...
- samsonradu 7y ago
  My 2 cents on low inflation: - Inflation gets 'exported' along with production to countries with lower manufacturing costs (because globalization). So no inflation but no working class either, resulting in income inequality - a problem of its own. - Depending on jurisdiction, inflation should include or adjust the weight of house prices (Eurozone), education costs, medical costs. These are goods that cannot be outsourced, hence they reflect higher inflation. - Shrinkflation - https://www.economicshelp.org/blog/24369/inflation/shrinkflation/ https://www.economicshelp.org/blog/24369/inflation/shrinkfla...
- Nasrudith 7y ago
  Printing money in itself doesn't - it is how the supply meets the demand. Devaluation requires a relative increase vs the economy. Distribution of money also affects how much inflation would take place. Driving inflation up from low is a nominal goal of QE but the magnitude varies.
dragonwriter 7y ago
> Except that those assets are owned with borrowed money. Someone has to eat the losses, and in an actual free market there are two options: the equity holders, or the bondholders. There are no actual free markets and there never have been; governments exist and always intervene in the market, and even if they didn't have something like the Fed executing monetary policy, there's typically the option of “past, present, or future taxpayers”; in the case of future taxpayers, often in part or in whole out of returns directly made from the gains from keeping the businesses afloat rather than letting them fail. > And so the charade will continue. What “charade”? It would only be a charade if the government pretended that monetary and fiscal policy wasn't part of the system of the economy, which it does not.

jdkee 7y ago

"the existence of a "lender of last resort" such as the Fed " This. The moral hazard here is enormous. And why should the Fed serve the interests of equity owners over the national interest in a strong, reserve dollar?

RealityVoid 7y ago
My feeling is that the answer to this is because these companies (arguably) produce something of value to the world. Letting them become bankrupt would mean they do not produce that something of value so that would be bad economics. And a case of not seeing the forest for the trees. The role of economy is to sustain a certain confort to the population, an people should forget that at their own peril.
- ahelwer 7y ago
  Bankruptcy doesn't mean the company's assets are thrown in the trash. It just means the current equity & bond holders get rinsed. Other presumably smarter people can then come in and run the company.
  - toomuchtodo 7y ago
    They mustn’t even be smarter, simply more ethical and responsible.
    - dragonwriter 7y ago
      They needn’t even be more ethical and responsible, either. Calvinist mythology aside, financial success isn't a symptom of moral virtue.
  - akiselev 7y ago
    Isn't the nature of a bankruptcy largely at the discretion of a judge?

tylerhou 7y ago

> Someone has to eat the losses, and in an actual free market there are two options: the equity holders, or the bondholders. The equity holders are eating the losses; have you seen the stock market? > Now, the Fed provides a third option: the holders of U.S. dollars, whose currency is devalued as money is printed to paper over the void which was opened up by the pandemic. And so the charade will continue. Money is being temporarily created and lent, in exchange for collateral (bonds) to avoid a lack of liquidity caused by decreasing asset values and more hesitant lenders. Once things go back to normal, the money will be destroyed since corporations will return the money in exchange for the asset again. The net currency devaluation is 0.

Hokusai 7y ago
> The equity holders are eating the losses; have you seen the stock market? This is a misconception. Loss or profit only happens when you sell your assets. Until then it is just economic potential. The trend of not paying dividends is at fault here. When you do not care about dividends but perceived future growth to earn money there is an incentive to over-commit and increase risk above any reasonable level. Adding to that, if someone's "investments" last just a few days or weeks. Then that person is not investing, that person is just speculating. And, speculators should not be shielded of market readjustments. If anything they should fully pay to use the market as a casino. But, back to the point, your assessment do not contradicts that companies are excessively leveraged and are not ready to survive though times. As the parent comment says, there is an incentive to leverage as much as possible and let the tax payers pay for the meltdown. "American Airlines spent $13 billion on share buybacks for 10 years through 2019". They should have used that money more wisely. Why should the taxpayers give money away or lent money at close to zero interest when the companies had the money and dedicated it to artificially increase share prices?
- tylerhou 7y ago
  > Loss or profit only happens when you sell your assets. This is a meme phrase; losses absolutely do happen before you sell your assets. (If I bought Enron at $90 and never sold, I didn't lose any money, right?) > "American Airlines spent $13 billion on share buybacks for 10 years through 2019". They should have used that money more wisely. Why should the taxpayers give money away You have two misunderstandings here. The Fed is not bailing out American Airlines by giving money away. That has to go through Congress. (I have no claims about whether bailing out AA is a good decision or not). Bailouts also generally are not free giveaways; the government often takes equity stakes. > or lent money at close to zero interest The Fed is lending everyone money at 0% to avoid a recession. Regardless of whether AA previously bought back their stock, they could still borrow at 0%. The Fed is doing this because the alternative (letting everything crash) is much worse. > when the companies had the money and dedicated it to artificially increase share prices? Share buybacks do not "manipulate the market" (not your words, but common phrasing among anti-buyback advocates) and artificially increase share prices. They return capital to shareholders. The share price goes up because the stock now represents a better return on investment (when AA buys back stock, it no longer a bunch of market cap tied up in money uselessly sitting around in a money market account). When times get tough, AA can sell equity for more money, which is a stock buyback but in reverse. That's what could happen here. This ebb and flow (raising capital by issuing shares when you need it, returning capital when you don't) is the whole point of equity markets. See https://www.bloomberg.com/opinion/articles/2020-03-17/the-good-times-for-airlines-are-over https://www.bloomberg.com/opinion/articles/2020-03-17/the-go... for a more comprehensive argument about why share buybacks for airlines are more rational than holding money for a rainy day.

ForHackernews 7y ago

> the holders of U.S. dollars, whose currency is devalued as money is printed I know that's what the macroeconomics 101 textbook says, but is there any empirical evidence this actually drives higher inflation? We've had historically low inflation for over a decade now[0], a decade during which the Fed has undertaken successive rounds of QE to the tune of $40-$85 billion per month.[1] [0] https://www.usinflationcalculator.com/inflation/historical-inflation-rates/ https://www.usinflationcalculator.com/inflation/historical-i... [1] https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1,_QE2,_and_QE3 https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1,_QE...

samsonradu 7y ago
My 2 cents on low inflation: - Inflation gets 'exported' along with production to countries with lower manufacturing costs (because globalization). So no inflation but no working class either, resulting in income inequality - a problem of its own. - Depending on jurisdiction, inflation should include or adjust the weight of house prices (Eurozone), education costs, medical costs. These are goods that cannot be outsourced, hence they reflect higher inflation. - Shrinkflation - https://www.economicshelp.org/blog/24369/inflation/shrinkflation/ https://www.economicshelp.org/blog/24369/inflation/shrinkfla...
Nasrudith 7y ago
Printing money in itself doesn't - it is how the supply meets the demand. Devaluation requires a relative increase vs the economy. Distribution of money also affects how much inflation would take place. Driving inflation up from low is a nominal goal of QE but the magnitude varies.

dragonwriter 7y ago

> Except that those assets are owned with borrowed money. Someone has to eat the losses, and in an actual free market there are two options: the equity holders, or the bondholders. There are no actual free markets and there never have been; governments exist and always intervene in the market, and even if they didn't have something like the Fed executing monetary policy, there's typically the option of “past, present, or future taxpayers”; in the case of future taxpayers, often in part or in whole out of returns directly made from the gains from keeping the businesses afloat rather than letting them fail. > And so the charade will continue. What “charade”? It would only be a charade if the government pretended that monetary and fiscal policy wasn't part of the system of the economy, which it does not.