5 ms·

> 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

> 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.
  - chii 7y ago
    > When times get tough, AA can sell equity for more money, which is a stock buyback but in reverse so why are they not doing this, but instead asking for low interest loans? (https://finance.yahoo.com/news/airline-ceos-promise-to-eliminate-dividends-and-stock-buybacks-if-congress-passes-29-b-coronavirus-bailout-175925540.html https://finance.yahoo.com/news/airline-ceos-promise-to-elimi...) The reason is that raising equity dilutes all current shareholders. It's a bigger "loss" to them than a termed interest loan which the tax payer gets minimal reward for taking on the risk. I say, that any bailout loans _should_ come with an equity dilution component. Tax payers should get compensated, or this moral hazard will just continue into the future.
    - tylerhou 7y ago
      > The reason is that raising equity dilutes all current shareholders. But like venture funding, dilution is fine as long as it means that the company survives or grows. I'd rather own 1% of a billion dollar company than 10% of a dead one. > It's a bigger "loss" to them than a termed interest loan which the tax payer gets minimal reward for taking on the risk. Yes, I agree, but my key point is that buybacks are a natural part of equity markets and are not done solely to "manipulate the market" as commonly claimed. > I say, that any bailout loans _should_ come with an equity dilution component. Tax payers should get compensated, or this moral hazard will just continue into the future. Agreed, any exceptional bailouts through the government should come with an equity stake. I'm fine with lending to airlines at normal corporate lending rates without needing any additional compensation, though.
      - chii 7y ago
        > I'm fine with lending to airlines at normal corporate lending rates without needing any additional compensation, though. the problem is that the current bond and credit markets have seized up because nobody wants to lend (at "normal" rates). If the gov't comes into the market and act as a perfect lender of last resort, then true price discovery don't happen, and you cannot really know what the "true" corporate lending rate would be. That's my take on why it doesn't work without an equity stake for the gov't to do the lending.
daxorid 7y ago
> Money is being temporarily created and lent What is your definition of temporary? QE 1/2/3 were each supposed to be temporary. But each one was never enough, and fed smoothly into the next. Then they finally tried reducing their balance sheet and the repo market blew up. Then "Not QE" repo support was supposed to last two weeks. Then only a few months. Now "only" a year, and at a trillion dollars overnight and half that in 14 day operations. How certain are you that at year's end, overnight repo support will be less than $1T? On which track record of correct predictions from central bankers do you base this belief? Since 2008, there's not a single Fed dot plot that has been even remotely accurate even six months out. SIX MONTHS. These people have absolutely zero credibility. They lied to you about the duration of QE 1/2/3, they lied to you about the duration of ZIRP, they lied to you about the direction and duration of rate hikes, they lied to you about repo market support amount and duration. During all this, they steadily changed their mandate from "price stability", to "some inflation", to "2% inflation", to "2% symmetric inflation", to "greater than 2% symmetric inflation". But this time, with QE4, they're super cereal pinky swear scouts honor giving you every reason to believe that it's temporary. Okay.
- avn2109 7y ago
  Should be top comment in this thread.
- llcoolv 7y ago
  This. It is basically a rigged system and a no-win game of feudals and peasantry. What happened to responsibility and equal opportunity? Are the 99% of population who are not involved in this scam even considered human beings?

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.
- chii 7y ago
  > When times get tough, AA can sell equity for more money, which is a stock buyback but in reverse so why are they not doing this, but instead asking for low interest loans? (https://finance.yahoo.com/news/airline-ceos-promise-to-eliminate-dividends-and-stock-buybacks-if-congress-passes-29-b-coronavirus-bailout-175925540.html https://finance.yahoo.com/news/airline-ceos-promise-to-elimi...) The reason is that raising equity dilutes all current shareholders. It's a bigger "loss" to them than a termed interest loan which the tax payer gets minimal reward for taking on the risk. I say, that any bailout loans _should_ come with an equity dilution component. Tax payers should get compensated, or this moral hazard will just continue into the future.
  - tylerhou 7y ago
    > The reason is that raising equity dilutes all current shareholders. But like venture funding, dilution is fine as long as it means that the company survives or grows. I'd rather own 1% of a billion dollar company than 10% of a dead one. > It's a bigger "loss" to them than a termed interest loan which the tax payer gets minimal reward for taking on the risk. Yes, I agree, but my key point is that buybacks are a natural part of equity markets and are not done solely to "manipulate the market" as commonly claimed. > I say, that any bailout loans _should_ come with an equity dilution component. Tax payers should get compensated, or this moral hazard will just continue into the future. Agreed, any exceptional bailouts through the government should come with an equity stake. I'm fine with lending to airlines at normal corporate lending rates without needing any additional compensation, though.
    - chii 7y ago
      > I'm fine with lending to airlines at normal corporate lending rates without needing any additional compensation, though. the problem is that the current bond and credit markets have seized up because nobody wants to lend (at "normal" rates). If the gov't comes into the market and act as a perfect lender of last resort, then true price discovery don't happen, and you cannot really know what the "true" corporate lending rate would be. That's my take on why it doesn't work without an equity stake for the gov't to do the lending.

daxorid 7y ago

> Money is being temporarily created and lent What is your definition of temporary? QE 1/2/3 were each supposed to be temporary. But each one was never enough, and fed smoothly into the next. Then they finally tried reducing their balance sheet and the repo market blew up. Then "Not QE" repo support was supposed to last two weeks. Then only a few months. Now "only" a year, and at a trillion dollars overnight and half that in 14 day operations. How certain are you that at year's end, overnight repo support will be less than $1T? On which track record of correct predictions from central bankers do you base this belief? Since 2008, there's not a single Fed dot plot that has been even remotely accurate even six months out. SIX MONTHS. These people have absolutely zero credibility. They lied to you about the duration of QE 1/2/3, they lied to you about the duration of ZIRP, they lied to you about the direction and duration of rate hikes, they lied to you about repo market support amount and duration. During all this, they steadily changed their mandate from "price stability", to "some inflation", to "2% inflation", to "2% symmetric inflation", to "greater than 2% symmetric inflation". But this time, with QE4, they're super cereal pinky swear scouts honor giving you every reason to believe that it's temporary. Okay.

avn2109 7y ago
Should be top comment in this thread.
llcoolv 7y ago
This. It is basically a rigged system and a no-win game of feudals and peasantry. What happened to responsibility and equal opportunity? Are the 99% of population who are not involved in this scam even considered human beings?