It took a lot of money and/or or electronic equivalents for the Federal Reserve to paper-over the 2008 meltdown. Moreover, the process of bailing out the insolvent U.S. financial system took many years, and the Fed had to repeatedly defend its position that in order to save the free market system the Fed needed to wreck the free market. Well, more than a decade since the subprime crisis started and the Fed has basically ripped its 2008 playbook up and gone (Wuhan)-batshit-crazy:
“The Facility also may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.” Term Sheet: Secondary Market Corporate Credit Facility (PDF)
Yes, the Fed is buying ETFs that purchase high yield debt (i.e. junk bonds). This style of market rigging doesn’t make a great deal of sense given that pension funds, one of the pools of capital the Fed always says it is most worried about, are not even permitted to own high yield bonds. Moreover, the Fed runs the risk that by purchasing junk bonds it will, like MBS starting in 2008, have to make the market for an extended period of time. Finally, the optics of the Fed buying junk are, let’s be honest, deplorable.
“If you think people were upset about bailing out banks where the CEOs were making $50m a year, how are they going to feel about bailing out private equity firms where the CEOs make $500m a year?” FT
What last week’s announcement confirms is that the Fed will, one day, be buying stocks (the groundwork is already being laid here, here, here, and here, to link a few). While this last link in the great chain of market rigging could take months or years to come to pass, don’t be surprised when it does.
The Fed Bullies Markets
A few days ago the Fed didn’t have the authority to buy junk bonds. Today, and after no congressional debate, apparently they do (with the Treasury). Leading up to this big event a handful of people, including Fed’s Rosengren and Yardeni, noted the Fed should be buying corporate bonds. However, by jointly suggesting the Fed should buy corporate bonds on March 18, former Fed bosses Bernanke and Yellen may have played the key role in crafting the Fed’s new policies. But even as Ben and Janet held hands and cheered “the Fed should buy corporate bonds” to secure (allegedly) their next sky-high speech fees, no one seemed to be talking about the Fed buying junk…
Today’s actions by the Federal Reserve are not temporary emergency measures to combat a 100-year flood, but a permanent addition/expansion to the Fed’s interventionist policies. Like a bully not allowing someones lunch-money to go unstolen, the Fed has learned to not let any crisis (real or imagined) go to waste. The Fed is aware that even as it reaches into every financial crevasse imaginable some dissent will emerge, but the story always seems to end with the Fed being the media-crowned hero. Consider last week’s junk buying announcement Powell’s “I am a unique money-printer!” moment. That Powell even went beyond what Bernanke and Yellen were suggesting is more than a little shocking.
“Our emergency measures are reserved for truly rare circumstances, such as those we face today. When the economy is well on its way back to recovery, and private markets and institutions are once again able to perform their vital functions of channeling credit and supporting economic growth, we will put these emergency tools away. ” Powell
Bernanke thought the same thing 12-years ago Mr. Powell, and the Fed is still making the market for MBS today.
In short, so long as the world remains addicted to USD the Federal Reserve believes its job is to keep the insolvent and dysfunctional U.S. financial machine booming by using any means necessary. Ironically, it is this very attitude that places the entire global financial system at risk…