This unprecedented rescue of corporate America, done without the outlay of a single U.S. dollar, was described by Fed Chair Jerome Powell in an April 29 news conference as not only necessary, but positive. “Many companies that would’ve had to come to the Fed have now been able to finance themselves privately … and that’s a good thing,” Powell explained. It is somewhat positive that distressed companies could turn to regular credit markets instead of bottom feeders like private equity vultures or Warren Buffett. And because of the existing connections to flood the financial system with money, bailouts are almost literally as simple as turning on a light switch.

But to properly assess the virtues of the rescue, you have to set it in context. The unemployment rate is 14.7 percent and rising. Car lines for food banks stretch for miles. As Americans continue to struggle and lose ground, the nation’s investment elite have been thus far saved from any downside of the coronavirus crisis. Beneficiaries are largely confined to stockholders, bondholders, and corporate executives (who are often major stockholders). Workers are not only not protected, they’re paying for the rescue, with taxpayer money propping up the Fed actions.

“This is a massive wealth transfer to owners of financial assets,” said Lev Menand, a former Treasury official who now teaches at Columbia University. “The rules of the game are supposed to be that equities take the loss, high-yield debt holders take the loss.” Allowing them to instead bear no burden is a form of socialism for capitalists.

It would perhaps be more tolerable if anyone other than the rich shared in the gains of this corporate rescue. But the Fed’s bond-buying program, unlike the Paycheck Protection Program, has no requirements on companies to retain workers. The Fed changed the term sheets between March 23 and April 9, eliminating any such requirements. Apple’s recent debt issuance, which could later be purchased directly or indirectly by the Fed, explicitly states that it will be used for, among other things, “share buybacks and dividends” — forms of leaking money to investors rather than keeping workers on payroll.

In addition, the Fed has essentially outsourced its bond-buying and loan-making authority to big money managers and banks, heightening the need for connections with these giants to get relief. Smaller companies, who don’t have the revenue or technical know-how to issue bonds into public markets, will find it more difficult to get in line for relief. Meanwhile, lending to small businesses and individuals has slowed as banks pull back during the crisis; by one count, interest rates charged to small businesses are now double the rates for large firms. Running bailouts through the Fed necessarily enhances the survival of large financial players and big corporations; everyone else must fight for crumbs.

Treasury Secretary Steven Mnuchin responded to this charge of special benefits for large corporations at a Senate Banking Committee hearing on May 19, essentially calling the stealth bailout a good thing. “The announcement of the corporate bond facility without putting up $1 of taxpayer money unlocked the entire primary and secondary market for corporate bonds,” Mnuchin said. “Companies that I had expected would need to borrow from us were able to borrow $25 billion in the primary markets” — a reference to Boeing.

Congress didn’t have to cede authority to the Fed and carp about it after the fact. It could have decided the parameters of any economic rescue. But that would involve making actual governing decisions, which Congress would rather defer to others. You can argue that, in the absence of state functionality, the Fed had to step in. But we’re living with the unequal consequences of a central bank that can only solve problems for one set of powerful interests. And perversely, rescuing investors — rich people like members of Congress and the donors they listen to — makes it easier for Congress to keep ignoring the needs of everyone else.

Even the Fed understands this at some level. On May 13, Powell pleaded with Congress to pass stronger fiscal aid to prevent a multiyear economic malaise. “Deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy,” he said.

On May 12, the Fed finally kicked off its corporate bond-buying program, 50 days after the fateful March 23 announcement. It was confined to purchasing corporate bond ETFs of once investment-grade “fallen angel” companies that had gone to junk. Within two days, $305 billion had been purchased. But while the purchases sent corporate bonds up in value, by and large the promise of bond-buying had already produced the desired effect. The Fed completed the bailout before ever administering it.

Some market watchers see the runaway rally in capital markets as irrational. “People that manage large portfolios and assets spent 10 years in a bull market fed by Federal Reserve intervention,” said Menand. “Their frame of reference is that something goes wrong and the Fed comes in, that’s a market opportunity.” Menand believes that the Fed won’t be able to sustain such valuations amid mass bankruptcies and high unemployment.

With the hope of a V-shaped economic recovery now completely dead, at some point the markets will have to take notice, and the sugar high from the Fed aiming its money cannon will wear off. Stocks fell modestly in May, and Goldman Sachs analysts have predicted a 20 percent drop in the next three months. Noted hedge fund manager David Tepper called the stock market in the first half of May the second-most overvalued market in his career, rivaled only by the dot-com boom. And in raw numbers, the valuation increase has gone well beyond the amounts the Fed has promised.

That’s what you get when you send the Fed in to handle a problem in the real economy. The Fed is ill-suited as a crisis manager; it sees its job as mainly to boost liquidity and keep assets strong.

“You can get loans, but loans don’t replace income,” said Nathan Tankus, research director at the Modern Money Network. Menand likened the moment to August 2007, when the Fed provided enough liquidity to avert crisis for a while. Eventually, there was a reckoning when asset prices declined and losses hit the system. “This is more like August 2007 than September 2009,” he said. “The idea that we won’t have massive insolvency at big companies is crazy. And the Fed will not be there.”

The Fed-induced rush into corporate bonds, in other words, pools risk in an unstable asset, creating the type of financial crisis it seeks to stamp out. Companies with functionally no revenue path in the near future taking on mounds of additional debt could set the stage for a series of defaults, which rose in April. Zombie companies being kept alive by debt markets eventually run up against the fundamentals of operating amid an economic depression. And indebted companies stave off liquidation by firing workers, as Hertz did last month to avoid bankruptcy. It didn’t help; Hertz filed for Chapter 11 on May 22.

The very knowledge that the Fed will save investors from trouble is likely to accelerate risk throughout the market. “If you told a family you can get a credit card at 18 percent [interest], but in a downturn we will give you an opportunity to get a 3 percent card, that would incentivize them to spend a lot of money,” Bharat Ramamurti, one of the members of the Congressional Oversight Commission, told me.

The Fed itself has called out this possibility. Powell’s comments on May 13 were accompanied by a May 15 financial stability report, warning that the financial system had “amplified the shock” of the coronavirus crisis. It raised concerns about debt defaults as its actions persuaded investors to buy up more debt. It warned that asset prices had “room to fall,” when the announcement effect created more of that room. It worried of defaults among high-risk “leveraged loans,” when these are precisely the kind of loans it’s vowed to buy through purchases of high-yield ETFs.

Just how deeply does the Fed have its fingers in the dough of the economy? Recent job growth numbers reflect what you’d guess — that the most rapid job creation is happening at general merchandise stores like Walmart and Costco. Right behind them are “monetary authorities-central banks.”

First published on The Intercept.

Shared via Creative Commons.