The Fed's New Asset-Buying Programs: Nationalization of Financial Markets?
That central banks are distorting markets is no longer a surprise to anyone. But the current pandemic succeeded in what the financial crisis of 2008 failed to achieve, namely to put the Federal Reserve’s balance sheet under political control. The Federal Reserve aims to intervene in financial markets to limit losses caused by the coronavirus pandemic, but the collateral risks of such a decision outweigh the benefits pursued.
With the supply shock caused by the forced shutdown, the Federal Reserve felt the need to intervene decisively in the functioning of the markets. If reducing the interest rate by 150 basis points only temporarily calmed the markets, the Fed decided to use all the instruments at its disposal. Thus, it initiated repo programs worth about $1 trillion dollars a day and new quantitative easing (QE) programs. But in addition to all this, new programs have been introduced that will be used to act directly on some segments of the financial market.
In this way, we have seen the introduction of "Secondary Market Corporate Credit Facility," marking the first time the Fed has included exchange-traded funds (ETFs) in the purchasing programs; the "Primary Market Corporate Credit Facility," buying corporate bonds directly from the issuer; or "Main Street Business Lending Program," which aims to loan directly to small-to-medium enterprises, most probably through an agency of the state. But in order to carry out these operations, the Federal Reserve needed a "waiver," which it obtained after concluding a collaboration with world's largest asset manager, BlackRock, Inc. BlackRock Inc. will act as an investment manager for two special-purpose vehicles (SPVs), these being legal entities created for a specific purpose. Since the Fed does not have the legal right to purchase securities that do not have government guarantees, BlackRock and special-purpose vehicles were a solution. At the same time, BlackRock will be the investment manager of a vehicle responsible for the acquisition of mortgage- and commercial property–backed assets issued by certain government agencies, as Fannie Mae, Freddie Mac, and Ginnie Mae.
In this way, BlackRock will act through SPVs in both primary and secondary markets of corporate bonds or ETFs. The problem is represented by the way these acquisitions are financed, here being the danger of nationalization of financial markets. The New York Fed will fund these vehicles on behalf of the Treasury, with the Treasury actually owning these securities. In this way, the Fed's balance sheet will come under political influence, the Treasury having the decision-making power, determining what exactly will be purchased and in what volume. Thus, the involvement of politics in the acquisition of corporate bonds, besides the fact that it will accentuate the misallocation of resources, with many bonds being purchased from companies considered too big to fail, will create all the premises of a nationalization, the price system being severely affected. In this way, we will witness sharp increases in capital market indices and the continuation of speculative bubbles facilitated by the extremely low interest rates. The lack of an economic readjustment, together with the direct financing of capital-consumption companies, will lead to serious economic imbalances.
Not all the technical details of the Fed-Treasury-BlackRock collaboration are known, but one thing is certain: the financial market will not be the same, and Japanification will eventually reach the American economy.