Coronavirus

Coronavirus and the $2 trillion plus bailout

Trump signs $2 trillion relief bill

The $2 trillion bailout bill rushed through congress won’t be the last one. In fact, it wasn’t the first when we take into account the 2008 bailouts. It is different in that there are some major concessions to workers, including a $600 per week increase in unemployment benefits and a 13 week extension of claims. After the outrage over the 2008 bailouts, and with an election coming up, Republicans and Democrats felt they had to make these and similar concessions. And they are welcome.

Corporate profits
They are matched by similar money to capitalists, such as a $25 billion grant to the airlines. But these and similar grants and loans should be considered in the light of how those companies have been spending their money in recent years. A column in the NY Times explains: “The companies that will be receiving the largest bailouts were, until recently, enjoying unprecedented levels of corporate profitability, thanks to large corporate tax cuts, industry mergers and the avoidance of significant wage increases for employees.

During the past decade, flush with cash, most of the companies in line to get taxpayer money did not prepare for a downturn. Instead, they spent enormous sums on stock buybacks, which reward shareholders and increase executive pay. For example, the airline industry, which is prone to booms and busts, collectively spent more than $45 billion on stock buybacks over the past eight years. As recently as March 3 of this year, with the crisis already beginning, the Hilton hotel chain put $2 billion into a stock buyback.

For their part, many creditors lent money at rates that did not fully reflect the risks to these industries. The debt loads have created their own fragilities during the economic downturn.”

There are some restrictions on that money. For example, companies that receive it are forbidden from using it to repurchase stock or pay dividends while the loans are outstanding. However, the overall point remains.

This “debt surge” represents a huge increase in sales of corporate bonds.

Bond Market
Possibly the most significant part of the bill in terms of longer term effects on the economy is the $4.54 billion that the Treasury is to give the Federal Reserve Bank (the “Fed”) which it can loan to companies in trouble. This in reality amounts to more – a lot more – than $454 billion. That’s because under banking laws, a bank can have outstanding loans of up to ten times what it has in its reserves. In other words, if a bank has $10 million out in outstanding loans, it must maintain $1 million in reserves in case some of those loans go South. So, in this case, the $454 billion can be leveraged into $4.54 trillion in loans. This is what one commentator
in The American Prospect magazine called a “money cannon”.

This money cannon will have a huge effect on the bond markets, and seems likely to save the bacon – and profits – of the bond industry. The reason is this: Companies sell bonds when they want to raise cash, either for something like building a new building or for something like a stock buyback. So the bond is, in effect, a loan and the more risky the loan (bond) is, the higher interest it will have to pay on the bond. In general, the lender/buyer of the bond doesn’t just hold onto that bond until it matures; he or she plans to sell it at some point. If, in the meantime, the interest rates have increased, the holder of the bond will have to sell it at a lower price. Otherwise, the purchaser will simply go elsewhere to buy a similar bond at the new, higher, interest rate.

In other words, as interest rates increase bond prices tend to fall, and vice versa.

Now, in this market, all loans/bonds carry increased risk, meaning that the prices will have to fall in order for any new purchaser to get an increased interest rate. What the Fed is planning on doing is buying bonds at their present prices. So, if I’m in the bond market and own $10 million worth of bonds, and the bond prices are going to be falling by 10% in the near future, the Fed will be saving me $1 million.

BlackRock
There is another side issue: The article
 in the American prospect explains, “Incredibly, the Fed put BlackRock, the world’s largest asset manager, in charge of this and two other bond-buying programs. One of the programs involves buying up exchange-traded funds, and nobody has issued more of those than BlackRock. The firm can theoretically direct itself to buy up its own troubled funds and take fees on it! Whatever the purchases, BlackRock unquestionably stands to make hundreds of billions of dollars.”

These are some of the things we can see immediately as far as financial effects and manipulation. For the longer term, we still have to see what will be the effect of this $4.54 trillion “money cannon” as well as the rest of the bailout provisions. In anticipation of this bailout, Oaklandsocialist had asked Will the dollar collapse? It is hard to see how such a huge increase in dollars cannot lead to that, but there is one other tendency: A collapse in value of the dollar means a relative increase in some other currencies. But all those other currencies are also seeing similar massive injections. So, then, the question is whether we are about to witness a world-wide inflationary spiral. We are already seeing the warning signs in the tendency towards what they call profiteering, for instance on Amazon and eBay. Gerald Posner, author of Pharma: Greed lies and the poisoning of America, explained “Pharmaceutical companies view Covid-19 as a once-in-a-lifetime business opportunity.” Why not? Business is business. And if there is a huge infusion of cash into the wallets of workers, and production doesn’t ramp up an equal amount, then what will happen? Obviously, prices will spiral.

Update
We should have anticipated it: The bailout bill contains clauses that prohibit companies that receive billions in bailout money from using that money to increase stock dividends or executive bonuses or to engage in stock buybacks. In order to enforce these provisions, a Special Inspector General for Pandemic Recovery (SIPGR) is established within the Treasury Department. The SIPGR will audit and provide reports to congress. Now, according to Vox Trump is saying he won’t comply with this provision. “I do not understand, and my Administration will not treat, this provision as permitting the SIGPR to issue reports to the Congress without the presidential supervision required by the Take Care Clause,” part of Article II of the provision, Trump has said.

In other words, the recipients of these hundreds of billions will be free to carry on speculating and looting society as they like, courtesy of the taxpayeers.

These are some preliminary thoughts on this bailout. 

For other oaklandsocialist commentary on this crisis, see:

Coronavirus capitalism and the forces of nature

Coronavirus and social distancing in the construction industry

Coronavirus, Trump and the “adults in the room”

Coronavirus and the battle for hearts and minds

 

 

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