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Analysis: Fed feeds the hand that fakes free market

stock prices diagram
By Paul Mackintosh  
June 24, 2020

Video games can be surprisingly instructive when it comes to finance. Look at the two classic Bioshock titles, portraying the failed undersea utopia of Rapture, run on pure Ayn Rand principles. One memorable game level features a theme park crammed with tableaux expounding Randian Objectivism, where the heroic individual, be he entrepreneur or inventor, is besieged by the evil, gouging State, through taxes, regulations and, God forbid, unions and welfare. And that’s increasingly what the US looks like – a decaying fantasy theme park, struggling to prop up a failed, creaking dogma.

Look at the US Federal Reserve and its new plans to buy corporate debt, exchange-traded funds and individual debt instruments. Even the barest hints of such a policy helped drive stock market investors into their latest frenzy of reality-denying buying sprees. As observers have readily pointed out, the Fed as ultimate backstop for indebted companies means less liabilities to debtholders, less risk of default for shareholders – and less market discipline on corporate operations.

Combine that with rock-bottom borrowing costs and you can see how troubled businesses might splurge on cheap debt. Where’s the discipline of the market there?

Fed Chairman Jerome Powell justified these actions to the Senate Banking Committee, saying that the central bank isn’t “wanting to run through the bond market like an elephant, doing things and snuffing out price signals…We just want to be there if things turn bad”.

Definitions and interpretations of bad obviously vary. Year to date, over US$1 trillion of investment-grade corporate bonds have come to market, more than double the 2019 pace, according to Barron’s. Trillions in investment dollars hitherto lying idle are now apparently available for any other purpose than helping people.

It would be interesting to cost out a guaranteed minimum income and see how it compares to the Fed’s buying spree, and then ask which would be more likely to reignite US consumer buying power, and which is a more responsible use of public money.

As Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said, “the Fed proved once again that it has illimited resources to prevent a market sell-off and to keep asset prices artificially bloated for the sake of the economy”.

President Donald Trump’s plans to spend billions on US infrastructure do appeal in principle. But this should be a soul-searching time for right-wingers who castigated Obamacare purely because of the name on the label, but who are now lining up behind policies more statist than anything former President Barack Obama attempted.

Whatever happened to the Republicans’ rallying cry of a balanced budget? Whatever happened to the robust, manly discipline of unfettered free market competition, with the losers deservedly going to the wall? It seems it’s trillions for Wall Street but not one cent for the people.