While most people’s attention is focussed on surviving the C0vid-19 pandemic, epic changing events have been going on in the world of finance that are being missed by most people but will likely impact for years to come.
It was predictable that there would be a significant number of corporations claiming compensation for the loss of earnings due to the government actions taken to restrict exposure to the Coronavirus. What was also predictable was that a significant number of them would use this opportunity to plead poverty, and suggest without a nice big bailout package that they would be facing collapse—though in many cases—any imminent demise being more due carrying too much debt and poor business management.
What was not quite so predictable, was the gargantuan size of the financial package that would actually be delivered. Some critics have labelled this:
‘Robbery in Progress. And it’s not a bailout for the coronavirus. It’s a bailout for twelve years of corporate irresponsibility that made these companies so fragile that a few weeks of disruption would destroy them.’
David Dayen reminds us that when the banks asked for a bailout following years of irresponsible and highly leveraged lending the Treasury Department sought a no-strings-attached deal that even eliminated the possibility of judicial review. Some Democrats called it a slush fund but according to Dayen, was eventually agreed to, ‘after a few mostly meaningless bits of oversight and some promises to help ordinary people.’ He further points out: ‘That $700 billion bailout was window dressing for trillions that came from the Federal Reserve, but kept Congress quiet, hooking them into the rescue of the system.’
It is only because Senator Bernie Sanders attached an amendment to the Dodd-Frank financial reform legislation of 2010 that the public and Congress found out the true extent of the previous bailout and unchecked money spigot of the Federal Reserve. This forced a release of the Fed data and mandated an audit by the Government Accountability Office (GAO). The Fed set up the Primary Dealer Credit Facility (PDCF) in 2008 following the economic collapse.
According to critics, ‘The PDCF was one of a hodgepodge of programs set up by the Federal Reserve and administered by the New York Fed from December 2007 to at least July 2010. In total, the Fed shovelled out $29 trillion cumulatively through all of its programs to bail out Wall Street banks, their foreign derivative counterparties, and foreign central banks—without any authorization or even awareness by Congress of the staggering sums of money the Fed was pumping out [my emphasis]. What concerns many is the Fed is using the same PDCF facility as it did in 2008.
Pam and Russ Martens are concerned by the Fed’s actions. The Fed has gone on an unprecedented buying spree of US Treasuries, by the end of February held $2.47 trillion representing 14.6 percent of all treasuries, according to them, making it, by far the largest single holder anywhere in the world. By the end of March, this had increased to $3.12 trillion. They suggest, ‘If the Fed keeps up this pace of Treasury buying, it will own the entire treasury market in about 22 months.’
As regards to its loans, they inform us that according to the latest figures the Fed, has given out $27.7 billion in loans from the new PDCF since it was created on March 17th. They suggest, ‘It’s time for the Senate Banking Committee and House Financial Services to come clean with the American People about the collateral that has been pledged on these loans and who is getting the money.’
When the Fed announced its largest-ever intervention in the financial markets on March 23rd one economist described it thus: ‘Bazooka is too timid a word to describe it. More like a neutron bomb. Our central bank, supposed defender of the currency and the stability of markets, can now purchase an unlimited amount of US Treasury and agency mortgage-backed securities (now running at the unheard-of rate of $625 billion per week). That’s on top of $1 trillion per week in repurchase operations. As amazing as it sounds, that’s not where the real action lies.
Karen Parker Feld informs us that the Treasury will create (or resuscitate) a series of special-purpose vehicles (SVPs) ‘to buy all manner of financial assets, backed by $425 billion in collateral conveniently supplied by the US taxpayer via the Exchange Stabilization Fund.’ She further explains, ‘The Fed will lend to SPVs against this collateral which, when leveraged, could fund $4-5 trillion in asset purchases.’ This apparently includes municipal bonds, non-agency mortgages, corporate bonds, commercial paper, and ‘every variety of asset-backed security. The only things the government can’t (transparently, yet) buy are publicly-traded stocks and high-yield bonds.’
Ellen Brown asks the question, ‘Was the Fed just nationalized?… Congress has now suddenly discovered the magic money tree. It took a few days for Congress to unanimously pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which will be doling out $2.2 trillion in crisis relief, most of it going to Corporate America with few strings attached. Beyond that the Federal Reserve is making over $4 trillion available to banks, hedge funds and other financial entities of all stripes; it has dropped the Fed funds rate (the rate at which banks borrow from each other) effectively to zero; and, it has made $1.5 trillion available to the repo market…The US central bank has opened the sluice gates to unlimited quantitative easing.’
As she suggests, quantitative easing, in theory, should be just a temporary measure which can be reversed by selling bonds back into the market when the economy recovers. However, as she suggests, ‘in practice, we have seen that QE is a one-way street. When central banks have tried to reverse it with “quantitative tightening,” economies have shrunk and stock markets have plunged.’ Effectively this means the debt is never really paid off, as she notes, the debt, ‘is just rolled over from year to year. Only the interest must be paid, to the tune of $575 billion in 2019.’ However, as the Fed rebates its profits to the Treasury after deducting its costs, as she suggests, ‘making the loans virtually interest-free. Interest-free loans rolled over indefinitely are in effect free money. The Fed is “monetizing” its debt.’
She further explains: ‘Unlike in QE, in which the Fed moves assets onto its own balance sheet, the Treasury will now be buying assets and backstopping loan through SPVs that the Treasury will own and control. SPVs are a form of shadow bank, which like all banks create money by “monetizing” debt or turning it into something that can be spent into the marketplace’.
David Dayen feels that the enormity of this bailout is being seriously under-reported. ‘The number you are hearing is $500 billion. Of that, $75 billion goes to the airline industry and the mysteriously named “businesses critical to national security.” The other $425 helps capitalize a $4.25 trillion with a T, leveraged lending facility at the Federal Reserve. The taxpayer dollars would soak up any losses from that lending program.’ As regards to the likelihood of any real supervision over the massive funds given to Corporate America, Dayen complains, ‘but the oversight is largely after the fact, without subpoena power, and mainly reduced to writing reports. How exactly do you expect a small, underfunded panel to find fraud in a $4.25 trillion lending facility? Especially when the current administration explicitly believes they are not required to turn anything over to Congress.’
So it’s not a $2 trillion bill, its closer to $6 trillion, and $4.3 trillion of it comes in the form of a bazooka aimed at CEOs and shareholders, with almost no conditions attached.
Whilst this may seem a significantly American issue, it is not. The ramifications of this bailout will have immense repercussions throughout the world economy, not least, in its effect on other governments and how they deal with their own economic settlements with their various corporate businesses and citizens. What is unsettling about this story is the way that the last bailout package was completely hidden before the Fed was forced to reveal its accounts. The fact that they are allowed to be so unaccountable, is preposterous in a modern world.
As David Dayen suggests ‘This is a rubber stamp on an unequal system that has bought terrible hardship to the majority of America. The people get a $1,200 means-tested payment and a little wage insurance for four months. Corporations get a transformative amount of play money to sustain their system and wipe out the competition.’
If you multiply this around the world the effect will be far-reaching. We may have just sold out the future to corporatocracy. Corporations will take this as an opportunity to further consolidate their interests and their power will grow more, resulting in an even larger concentration of power and influence over the political systems of each country.