First Response

The stock market is closed for the Good Friday holiday, but it’s been a good Friday anyway. The S&P 500 had its best week since 1974, and the Dow Jones industrial average came an inch within its best week since 1938. I probably don’t have to remind you that at least 16,686 Americans are dead and almost 17 million out of work from the coronavirus crisis, which is not happening in an alternate universe but in the same America as those record stock numbers.

Wall Street has never been indicative of the real economy, but that has never been more stark than in this pandemic. At a time when top analysts now expect a 40 percent reduction in GDP this quarter, while individuals and small businesses wonder where their relief will come from and why it’s taking so long, investors have received the only working bailout. Matt Stoller calls it the Cantillon effect, after an 18th century French philosopher who identified that you must be closer to the king to benefit from society’s rewards. I have just been saying that where you stand in this country depends on which government program assists you in a crisis; one that can barely stand on its feet after decades of defunding and disinvestment, or the Federal Reserve.

That $4.5 trillion money cannon that the Fed got license to assemble in the Congressional bailout hasn’t actually done anything yet. Yet the Fed already is carrying over $6 trillion on its balance sheet, adding nearly $2 trillion in four weeks. It cut interest rates to nothing and is lending to banks. It’s holding up short-term funding markets like repos and money markets with hundreds of billions in liquidity. It’s buying Treasury bonds, mortgage-backed securities, auto loan-backed securities, credit card debt-backed securities, student loan-backed securities, small business loans, commercial paper, commercial real estate mortgages, corporate bonds, and exchange-traded funds. And yesterday, it announced another $2.3 trillion in programs; in total there are now nine.

The new facilities will buy state and municipal debt for the first time, an unprecedented expansion into those markets, though its somewhat limited because it will only be short-term bonds. On the corporate side, the Fed will undertake direct lending to businesses with up to 10,0000 employees, firms in between the small business lending program authorized by Congress (which the Fed is buying loans from) and those that issue corporate debt (which the Fed is also buying). In addition, the Fed will buy so-called “below-investment grade” debt, otherwise known as junk bonds. As long as the debt was highly rated before March 22, it’s eligible for purchase.

In other words, pretty much every company in America qualifies for a loan that can in some way be touched by the Fed. Maybe a few walking dead companies won’t be able to tap the money cannon, but they’re the exception, not the rule. If you want to know why investors are so happy, it’s because they’re all getting bailed out. Every one of them. And the perfectly rational exuberance reflects the anticipation of this bathtub full of cash for each player in the Wall Street casino.

That includes the most controversial corners. It was thought that private equity-owned firms would be shut out of the window, at least for the small business loans. But the Fed can buy exchange-traded funds that specialize in high-yield debt, which is likely to sweep in heavily indebted private equity portfolio companies. If there are nine relatively opaque emergency lending programs, anyone with a modicum of power will find a way to get something out of at least one of them. “If you think people were upset about bailing out banks where the CEOs were making $50m a year, how are they going to feel about bailing out private equity firms where the CEOs make $500m a year?” as one investor put it to the Financial Times.

The Fed nominally has to abide by Congress’s meager conditions (see Jesse Eisinger on just how meager), but those conditions can be set aside at any time. The Fed doesn’t even have to keep records of its meetings about any program that uses Treasury funds, as the one announced Thursday does. The SEC’s Jay Clayton has said that companies “should” disclose how much money the Fed will fire at them and when, which is nice. But that’s more recordkeeping than oversight. And don’t get me started on the oversight.

It’s not just that there will surely be massive fraud coming out of this, though there will. The scandal is what’s legal. Everyone in the markets gets a piece of this action, and nearly all of those people are already fabulously wealthy. It took Chamath Palihapitiya, a billionaire Facebook investor, to express the actual capitalist position here: the sophisticated investors who took the risk should be in line first to suffer consequences, not workers and small business owners. To an apoplectic CNBC host, Chamath calmly explained: “What we’ve done is disproportionately prop up poor-performing CEOs and boards, and you have to wash these people out... Just to be clear on who we are talking about. We’re talking about a hedge fund that serves a bunch of billionaire family offices, who cares? They don’t get the summer in the Hamptons? Who cares?”

Lucky for them, the Fed cares.

Odds and Sods

Here’s some of our coverage at the Prospect:

Gabrielle Gurley looks at another danger for health care workers: having to use radically downsized and therefore crowded-with-essential-employee public transit to get to work.

Eleanor Eagan on how the failure of oversight in the Trump era set the table for the weak performance by House Democrats during the coronavirus crisis.

Brittany Gibson on how expanded vote by mail will lead to slow vote counts, which Trumpist Republicans equate with fraud. A real danger.

Jake Bittle on the enormous strain on state and local governments.

Also, I was on the BradCast with Brad Friedman talking about a bunch of these matters.

Phase 3.5

Turning back to the America off Wall Street, the impact of this crisis economically is just staggering. A third of all those surveyed in a Data for Progress poll have lost their job, been furloughed, been placed on temporary leave, or had hours cut. State and local governments will need at least another $500 billion just to meet basic service needs, says the Economic Policy Institute. The $1,200 checks will be out in direct deposit next week, according to Treasury Secretary Mnuchin, but the 100 million without that set up will be waiting a long while. I’ve only heard of two states implementing the $600 boost to unemployment checks so far: Minnesota, and California starting tomorrow. There are 50 states. I keep hearing about intricacies of the unemployment system making it impossible for people; in South Carolina you can’t file twice in a year, so anyone who got off unemployment recently who then were dumped in the pandemic get nothing.

This is why Congress wants to do a fourth package to meet the rising need. Only this week Republicans considered an “interim” package—call it Phase 3.5—which would quickly and without dissent supply $250 billion more to the (also creaky and insufficient) small business lending program. Democrats blocked the bill in the Senate yesterday, because they wanted additional items attached; Nancy Pelosi said a standalone small business bill could not pass.

Democrats are asking for: another $100 billion for hospitals, another $150 billion for state and local government, and a 15 percent boost to food assistance. If you noticed that requiring to send every voter a mail-in ballot is missing from that list, you’re very sharp. In fact, Democrats have all kinds of ideas for a fourth bill that they’ve left out of this Phase 3.5. Republicans really only want the small business lending expansion, and if they get it they’ll likely walk away from everything else. So why do an interim bill and give away even more leverage, without getting the maximum benefits? The way that Democratic leaders structure the game makes them lose before it’s even played.