Why people say that in times like this Fed printing money and government “bailouts” are bad?

by ObservationalHumor

Simplest answer? General ignorance of how these polices are implemented, what’s driving the problems in the economy, their impact and what exactly the stakes are if they are not pursued.

In general it tends to boil down to some oddball moralizing argument about how debt is innately bad and you periodically need waves of mass bankruptcies to cleanse the system in some manner. More recently and coronavirus specific there’s also an oddly apathetic attitude that the only way to address issues is simply deal with the virus, or if we can’t wait for it to run its course and pick up the pieces later.

The Federal Reserve, its policies and their mechanics in the financial system are also grossly misunderstood in general. You’ll get stupid statements about money printing and monetizing debt when the truth of the matter is that pretty much everything the Fed does and has been doing relies on either increase the amount of bank reserves in the system or doing collateralized loans and acting as a market maker. Stuff like QE and many of their lending facilities are also reversible and can be wound down as they were in the GFC. You can tack on a huge misunderstanding about how and why the Federal Reserve generally moves interest rates and the economy’s response to the list of why you see idiotic statements about policy here too. There’s a belief among a lot of people that because interest rates were in the 4-5% range 20-30 years ago that’s where they should have been 5 years ago despite the inflation expectations that are set by the market itself being far far below that.

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There’s also the misconception that the current problem is because companies were innately overleveraged in general versus there being a frankly unprecedented drop in demand of 80%+ across the entire globe. Usually tacked on to that is the belief that coronavirus “isn’t the real problem” just a trigger. While it’s always true that better balance sheets help in any slow down, the absolutely severity of this event is much worse than your run of the mill recession or even the great recession for at least the next 4-8 weeks.

It’s one thing if demand drops 10-20% in one country and completely another if it’s dropping by 80-90%+ and the government flat out bans your ability to do business in many instances and your earnings/cash flow absolutely collapse.

I don’t think there’s any appreciation for just how bad things have become in credit markets either and the fact that the Federal Reserve’s policy primarily targets those markets. Spreads have blown out and everyone wants cash to weather the storm here, which means there’s very few actual buyers without the Fed stepping in to backstop markets or loan cash out against safe securities like treasuries and agency MBS debt. Credit lines are maxed out and banks are loathe to extend additional credit given the uncertainty going forward and their existing commitments. People piss and moan about the Federal Reserve creating money, but the chief way in which money creation actually occurs is via banks loaning new money into existence and most of the ‘money’ the Fed puts out there doesn’t actually circulate in the real economy until banks lend against (which they don’t even need to right now given reserve requirements are at zero). Deflation is the bigger risk right now given the enormous pull back in lending across the board along with the velocity of money slowing greatly due to lay offs, furloughs and lower consumption due to people hunkering down. The supply shocks people were worried about several weeks ago almost seem like an afterthought at this point, but may prove problematic going forward after the worst of the virus has passed and business has to start going again.

Fiscal policy is viewed in much the same way. Stimulus entails taking on debt which some people are just universally against and there’s the same group of apathetic ‘nothing matters until the virus is gone’ people in there too who see it as just a waste of money versus a way to keep households and businesses from collapsing in the interim period.

In general almost all of these subjects are fairly complex, dry and super esoteric. The vast majority of people aren’t going to take the time to actually research and read up on them to the extent necessary to have a decent understanding of them. They likely get their news from some fringe political website or YouTube channel and it shows just about every time they try to debate someone knowledgeable on the subject.

Thankfully the people in charge of making decisions and implementing policy do understand the mechanics and risks for the most part, though there can be ideological factions that hamstring responsiveness as we’re seeing the fiscal stimulus bill currently.



Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.