Today they started bailing out junk bonds
This is relevant to the topic of my last Green Horizon article which talked about how things have been moving toward governmental management of the capitalist economy.
Pity the poor investor who tries to stick to a simple program: “buy low, sell high.” What becomes of such a program when the government steps in every time the markets threaten to go low?
Who could have imagined that the monetary authorities would do the radical and unprecedented things they now seem to be willing to do? They’re going beyond the bounds of formal legality. They keep injecting funds intended to prop up the system . . . but such policies have major downsides: (a) they increase wealth inequality; (b) they increase “moral hazard.” The latter means that there’s so little risk these days to borrowing and speculating that (naturally) the players tend to over-borrow and over-speculate! Not surprising, then, that debt levels in the system have become extremely high.
Here’s the drama: It’s possible that the extent of the debt created since the last crisis will now overwhelm any and all efforts of the Fed to sustain their “propping up.” Also: some of the monetary stimulus is “money tree” funds, but some creates additional debt (governmental debt bailing out corporate debt).
All unprecedented.
It sure ain’t your grandfather’s capitalism anymore . . .
This from an article today at one of the financial web sites:
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By pushing the Federal Reserve into corners of markets it has mostly shunned in its 106-year history, Chairman Jerome Powell is running into some thorny questions. Like, for instance, how to maintain independence from the U.S. Treasury when the economic-support package Congress passed says they should work together? Or whether the same guidelines for companies receiving federal aid, which range from compensation limits to off-shoring restrictions, apply to the Fed if it gets more money from Treasury? And how about which companies — and perhaps eventually, municipalities and states — are invited to borrow and at what cost? “This is going to lead to a complete re-examination of the role of central banking and the Fed’s independence,” warns Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a Washington research firm. The Fed’s steps into credit allocation are tantamount to “a complete redesign of central banking on the fly.”
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