Blame the Fed for the Disconnect in Markets
Comment of the Day

June 11 2020

Commentary by Eoin Treacy

Blame the Fed for the Disconnect in Markets

This article by Jim Bianco may be of interest to subscribers. Here is a section:

“If a company like that doesn’t have market access and can’t roll over its debt and can’t have enough cash on hand to deal with its obligations, what they’re going to do is they’re going to lay people off. … So, by announcing our facility and including those companies, the ones who actually need the credit… now [have] lots of cash on their balance sheets.”

So, what if free markets do not want to finance companies with shaky operations? The Fed has decided it will effectively nationalize debt markets by removing the risk for investors so that these companies can get the funds to continue operating. In the Fed’s way of thinking, higher and vibrant markets create and save jobs.

To be sure, that is what largely happened after 2008 financial crisis as the central bank began buying bonds under a policy known as quantitative easing. A steep price was paid.

While the economy grew for almost 11 years in the longest expansion on record, annualized growth was below average. This was attributable to an economy that had become less flexible and more reliant on stimulus.

Another consequence was laid out by former Federal Reserve Bank of New York President and fellow Bloomberg Opinion contributor Bill Dudley last week: The Fed’s choices: not have a recovery, have less inequality; or have a recovery with buoyant financial asset prices and more inequality.

Eoin Treacy's view

The natural disaster response is to do everything possible to ensure the economy is in the best place possible to bounce back. That means saving the banks, ensuring ample liquidity and supporting consumers. Without those measures we would have to resort to barter to get financial transactions done.

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