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Can you clarify why it's not a valid comparison? My lay understanding is that if you recycle your debt at 3%, and now you can recycle it at 1%, that is a 2% "b

Can you clarify why it's not a valid comparison? My lay understanding is that if you recycle your debt at 3%, and now you can recycle it at 1%, that is a 2% "bailout". You quite literally have a lower cost of funds (cost of doing business), and it is artificially low due to government intervention.

cperciva 6y ago
They're both handouts, yes. But a $100 cash handout is $100, while a $100 loan at 2% below prevailing rates is $2. It becomes an invalid comparison when you compare nominal values without making the appropriate cost adjustment (multiplying the loan by 2% in this hypothetical).
- clarkevans 6y ago
  Except that the loans they are making are not $2 below prevailing rates. Many of these businesses are near insolvency and are unable to get loans in the open market. These loans are huge gifts; if they were given by private equity, they would additionally come with a large equity position. When they don't, they are gifts, equivalent to the equity position that isn't taken and the high interest rate avoided.
  - cperciva 6y ago
    Right, I suspect that the interest rate differential is higher than 2%. In some cases the businesses receiving loans are insolvent and the loans are effectively non-repayable, i.e. gifts -- but not all. The true cost is almost certainly somewhere between 2% and 100%.
- gregwebs 6y ago
  This is a good point. It's interesting to note, though, that the fed's balance sheet never really goes down and that today mortgage backed securities are still a huge part of the balance sheet and that the fed is still active in this area even though the MBS purchase program was ended. We should also note that some of the companies will go bankrupt and the fed is doing little to qualify its loans. So it is not really a loan in the traditional sense (it is a low interest rate loaned handout). Combining these two together, we have the potential to create a situation like Japan where the government is constantly managing the debt of some of the private sector. The cost on society for this can be much higher than the difference on interest rates shows.

cperciva 6y ago

They're both handouts, yes. But a $100 cash handout is $100, while a $100 loan at 2% below prevailing rates is $2. It becomes an invalid comparison when you compare nominal values without making the appropriate cost adjustment (multiplying the loan by 2% in this hypothetical).

clarkevans 6y ago
Except that the loans they are making are not $2 below prevailing rates. Many of these businesses are near insolvency and are unable to get loans in the open market. These loans are huge gifts; if they were given by private equity, they would additionally come with a large equity position. When they don't, they are gifts, equivalent to the equity position that isn't taken and the high interest rate avoided.
- cperciva 6y ago
  Right, I suspect that the interest rate differential is higher than 2%. In some cases the businesses receiving loans are insolvent and the loans are effectively non-repayable, i.e. gifts -- but not all. The true cost is almost certainly somewhere between 2% and 100%.
gregwebs 6y ago
This is a good point. It's interesting to note, though, that the fed's balance sheet never really goes down and that today mortgage backed securities are still a huge part of the balance sheet and that the fed is still active in this area even though the MBS purchase program was ended. We should also note that some of the companies will go bankrupt and the fed is doing little to qualify its loans. So it is not really a loan in the traditional sense (it is a low interest rate loaned handout). Combining these two together, we have the potential to create a situation like Japan where the government is constantly managing the debt of some of the private sector. The cost on society for this can be much higher than the difference on interest rates shows.