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timavr | 5 years ago
There is nothing wrong with government providing liquidity by purchasing corporate debt and replacing lost cashflows.
A lot of corporation are so leveraged, that if they can't get the new loans to pay principles on old loans, they are in big trouble. They constantly refinancing every few years.
Market conditions are so uncertain right now, that investors don't want any of that and would like to sit on the sidelines or charge crazy interest rates.
As a result Fed stepped in and said that they are happy to participate in the market to make sure the interest rate stay low and companies have access to capital.
EXAMPLE:
Corp borrows 100 dollars to build a factory at 5% annual interest to be repaid back a year later.
Corp builds a factory and makes 7 dollars that year profit.
In the end of the year they have 2 dollars in their account ( 7 minus 5 interest). So how they supposed to pay back 100 they borrowed?
They just go borrow another 100 , pay it back to early investors and cycle repeats. This business is generating 2% return to shareholders and 5% to bond holders. Sucks to be a shareholder in this, but they are in the green.
Obviously it is way more complicated in real life but it is exactly the same principle. Access and cost to capital is what businesses needs to survive. Here is example of Tesla doing it -> https://edition.cnn.com/2020/01/31/investing/tesla-cash-crun....
The moral here is that Fed willingly just creates money out of the thing air, totally realizing that they might never get it back. If those loans blow up, they just write it off and add to the national debt for future generations to pay.
If corporation goes bankrupt, nobody is chasing CEOs to pay back their multimillion salaries funded by taxpayes. It is just cost of doing business and I am fine with it.
Can we just extend same courtesy to the rest of the citizens. As the great American philosopher said: "Corporations are people my friend"
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