The stock market rejoiced on Monday with stories such as this CNBC “breaking news” headline:
The Fed says it is going to start buying individual corporate bonds.
But here’s the interesting thing: this isn’t actually “news.”
The Fed’s announcement and the various mainstream media releases that followed didn’t offer much of anything we didn’t already know. In fact, we’ve noted the $750 billion bond buying program in several previous articles. We see that on the Fed’s weekly statistical release on May 14 it was noted that the financial statements were modified to include the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF):
These facilities operate through the Corporate Credit Facility LLC (CCF LLC), a special purpose vehicle that was formed to support credit to employers through bond and loan issuances and to provide liquidity to the market for outstanding corporate bonds.
As noted above, the CCF LLC is where the purchases of corporate bonds and bond exchange-traded funds (ETFs) will be held on the Fed’s balance sheet. The program started with the first purchase last month and has been growing since. The balance now stands at $37 billon per last week’s release.
The difference between the two programs is not slight, as the PMCCF funds indicate that money is being created and lent directly to corporations while with the SMCCF money will be created to buy bonds from existing investors. When announcements of new money programs are made, markets seem to rally. But what of the negative effects which come with this credit expansion? Should the risk of bond default, trading losses, interest rate risk, propping up “zombie companies,” and countless other effects not be addressed by the Fed? What the Fed thinks about this remains unclear, as the usual “crisis,” “credit,” and “liquidity” buzzwords appear to be more important than anything negative that comes from these lending schemes.
Chair Powell presented the "Semiannual Monetary Policy Report to the Congress," where he shared his thoughts about the virus, job loss, the downturn, and the importance of the flow of credit, noting:
If not contained and reversed, the downturn could further widen gaps in economic well-being that the long expansion had made some progress in closing.
Ironic, since the Fed’s actions have done more for inequality than the virus ever could. Like the virus, the Fed’s actions should be “contained and reversed.” If not, we will watch as more Fed programs spread across the countryside, destroying both wealth and our future in the process under the guise of trying to alleviate a crisis which can hardly be articulated. Whatever is required to stop the Fed will not come from mainstream economists nor the media. But something must be done! Until that time, the “economic well-being” gap will continue to widen.
