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Archive for May 16th, 2020

As I mentioned back in March 2020, the economy is in free fall but the billionaires are thriving, and stocks of big private equity firms are soaring dramatically higher. As usual, the billionaires have been the real beneficiaries of the federal government’s massive rescue efforts. 

Ten weeks into the worst crisis in 90 years, the government’s effort to save the economy has been both a spectacular success and a tremendous failure.

Two events showed this better than anything. On Friday, May 8th, 2020, the government reported that 20.5 million people had lost their jobs in April. That is massive damage to the middle class. The rich receive 2/3rds to 100 percent of their income from holding corporate stock. The stock market rallied with the news of the 20.5 million lost jobs. They are likely expecting trillions more from the Federal government and the Federal Reserve. 

The second event happened on Thursday, May 14th. The government reported the middle class lost another 3.8 million jobs, and the stock market rallied again both that day and the following day. 

If you’re looking for the billionaire’s decision on who has won the four government and Federal Reserve bailouts, consider these returns: Shares of Apollo Group, the giant private equity firm, have soared 80 percent from their lows. The stock of Blackstone, another private equity behemoth, has risen 50 percent. The Nasdaq Composite Index has gotten back nearly all of its losses. 

 

ProPublica reports that billionaire clubs such as “Apollo and Blackstone, disproportionately the wealthiest and most influential, have been insured by the world’s most powerful central bank. This largess is boundless and without conditions. “Even if a second wave of outbreaks were to occur,” JPMorgan economists wrote in a celebratory note on May 9th, “the Fed has explicitly indicated that there is no dollar limit and no danger of running out of ammunition.”

“Many aspects of the coronavirus bailout that assist individuals or small businesses, meanwhile, are short-term or contingent. Aid to small businesses comes with conditions on what they can do with the money. The sums allocated by the CARES Act for stimulus and expanded unemployment insurance are vast by historical standards. But the relief they provide didn’t prevent tens of millions from losing their jobs. The assistance runs out in weeks, and the jobless live at the mercy of a divided Congress, which will decide whether that help gets extended and, if so, for how long.”

Meanwhile, the billionaire’s investment clubs can expect additional trillions of dollars from the Federal Reserve and U.S. government. Picture the CEOs of these firms manipulating puppets by a string, then picture Nancy Pelosi and Mitch McConnell and you’ll understand how politics work. 

ProPublica went on, “The Fed’s efforts, universally praised for their boldness and speed, have come in two stages. First, in February and March, the central bank shored up the capital market “liquidity,” which marks how willing investors are to buy and sell. The central bank’s role is to be a “lender of last resort,” working through banks so they can get money to companies and people.

The second stage of the Fed’s extraordinary rescue goes beyond liquidity. It has said it will buy assets it has never bought before. For almost 100 years, the Fed purchased only government bonds. Now it has announced a wide variety of programs to buy various forms of corporate and other debt, either by direct lending, by buying bonds, or buying loans.”

The mere announcement that the Fed would do this had an immediate effect, spurring the boom in corporate borrowing. For example, if Amazon issued a bond costing $1 trillion at face value and it comes due in five years. The Fed simply buys the bond and Amazon gets $1 trillion from the Fed. When the bond comes due in five years,  the Fed will simply print up the money and pay itself. Meanwhile, Amazon and its mostly billionaire and multi-millionaire shareholders divvy up the trillion dollars among themselves. 

ProPublica reported, “The Fed didn’t stop with the most solid, safest corporate stalwarts. In early April, it also announced something unprecedented. The central bank said it would buy junk bonds, debt issued by fragile companies, many of which already have crushing debt loads. Sure enough, junk bonds roared back and their cousins, leveraged loans, revived.

In doing so, the Fed backstopped the riskiest markets in the world. The most dangerous investments in the world, it should go without saying, are not owned by middle- and working-class Americans, to whom every politician pledges fealty. No, they are owned by the most risk-seeking investors in the world, the ones that need the highest returns: private equity firms and hedge funds.

The Fed has to work through the credit markets. The House and Senate have much greater powers, the power of the purse and of legislation. Congress could have passed laws that directed help in different ways. Europe has essentially nationalized payrolls, a much more direct form of aid to people who have lost the ability to work. However, the rotted corruption of the U.S. Federal government has seen it reluctant to use sufficient fiscal measures going back to the 2008 rescue.

What happens if the economy doesn’t come back soon? If the health crisis does not pass quickly, or if the economy does not roar back, the Fed’s actions might prove inadequate. But investors shouldn’t be too worried. They have been taught they can count on the government to rescue them from their bad investment decisions, and so they can make plenty of bad investment decisions. 

The Bailout is Working for the Rich-ProPublica

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