With very little fanfare, this Covid policy quietly got the chop.
The tide comes in, the tide goes out.
So, very quietly last week, the US Fed called the top on the EZ Money era.
When Covid hit, the world’s policy makers pulled literally everything they had out of the hat.
No idea was too crazy… or too expensive.
Like what?
Like how about the US Fed bailing out the US share market?
This is one thing they did that didn’t get the attention it probably deserved. Early on, the Fed announced that they were purchasing corporate bonds.
(Remember bonds, like equities or shares, are just another debt instrument. Buying bonds, buying shares, same same. It all supports the company and its share price.)
So the Fed just printing a whole stack of money, and bought corporate debt with it.
Of course, they weren’t saying it was to bail out the share market. It was to “ensure liquidity and proper functioning.”
But this is just white-wash.
Imagine you have a lemonade stand and you’re not selling any lemonade. Your dad comes out and says that he’s going to provide liquidity to the lemonade sector to ensure proper functioning on the lemonade market.
He buys some lemonade.
It’s exactly like that.
(No, exactly.)
And from the start of Covid through to end of 2020, that’s what the Fed did. They printed money and bought lemonade from America’s biggest companies.
Now, however, they’re looking to offload what they bought.
From The New York Times:
The Federal Reserve’s first-ever foray into the corporate bond market will come to a final close in coming months, with the central bank announcing Wednesday that it will sell off its exchange-traded fund investments and direct bond holdings.
The sales, which a Fed official said the central bank expects to complete by the end of the year, will finish off a program that was the first of its kind. The Fed announced in March 2020 that it would begin buying corporate debt using its emergency lending powers. The manoeuvre was an effort to unfreeze the flailing bond market as panic, inspired by the then-unfolding pandemic, threatened to keep American companies from renewing their debt or borrowing more.
The announcement worked almost instantly, restoring investor faith in the market and helping it to begin functioning again.
… The corporate bond effort was perhaps the most controversial of the Fed’s 2020 relief programs, drawing criticism from some Democrats who felt that the central bank was helping big companies more than smaller ones and households. Some critics even argued that the program had effectively “bailed out” companies, although the program worked indirectly, helping to reopen choked markets.
Pfft. Whatever. It was a bail out. It was a government promise to support the share market no matter what.
I’m genuinely surprised people aren’t angrier about it.
But that’s the way the world works.
And at the end of the day, this isn’t going to make a huge difference. The bailout was small, especially compared to the Godzilla like spending program that Biden’s unleashed on the economy.
So it won’t move the needle much.
But the lesson’s been learnt. Markets now that if the doo-doo hits the fan, the government has it’s back.
So much for free markets.
JG