The Fed’s crisis response: Helping corporations, yes, but mostly at the expense of financial predators
A number of recent articles imply that Americans should be mad at the Federal Reserve for bailing out the rich in the coronavirus crisis. This seems wrong to me. We should be mad at nearly every other policymaker—mostly Congress and the president—for failing to do enough to bail out typical working families.
The Fed, conversely, has maximized the weak tools it has available right now for helping these families. Maybe we should give the Fed more and better tools for future recessions—but it’s not useful to get mad at the Fed for failing to do things it can’t do right now.
This is not to say the Fed is a force for good always and everywhere. There really are times when the Fed intervenes on the side of corporate interests in what is essentially a distributive conflict between labor and capital. (By “capital” I’m including the corporate managers who serve as corporate agents and whose rewards trade off pretty sharply against typical workers’ pay.) Usually the Fed’s intervention on behalf of capital occurs when it cuts economic expansions short by raising interest rates in the name of controlling inflation, robbing typical workers of the leverage to secure faster wage growth that really tight labor markets could give them. As we have often written, these actions by the Fed have been hugely consequential, contributing significantly to the disastrously slow wage growth for the bottom 80% of the U.S. workforce for most of the last 40 years.
However, lots of recent evidence suggests that the Fed—now recognizing how distributionally important these past episodes have been—is genuinely concerned about avoiding the kind of prematurely contractionary policies that curtail employment possibilities for traditionally disadvantaged groups and hamstring typical workers’ wage growth. This has been a huge progressive win.
Today’s Fed intervention is not part of a capital–labor conflict
By lending to and buying the debt of private businesses in response to the coronavirus crisis, the Fed is not wading into a capital–labor conflict on the wrong side. Instead, it is wading into a conflict between nonfinancial capital and financial predators.
Take the case of a notably unsympathetic nonfinancial corporation: Carnival Corp., operator of Carnival Cruise Lines. In a recent article generally critical of the Fed’s actions, The American Prospect’s David Dayen tells a story about how Carnival needed bridge financing to survive the shutdown in the cruise industry caused by the coronavirus:
Carnival was flirting with a consortium of hedge funds on a high-interest loan above 15 percent. These vulture funds, including Apollo Global Management and Elliott Management, specialize in distressed debt, squeezing governments and businesses with no alternatives. If Carnival couldn’t repay the loan, the hedge funds would be primed to take ownership.
But the March 23 announcement, signaling a Fed backstop to all comers, suddenly gave Carnival new options. Within days, it had secured $5.75 billion in loans, including a $4 billion bond issuance at 11.5 percent interest, and a $1.75 billion bond at an even smaller 5.75 percent rate that could be converted into Carnival stock.
To boil this down: Hedge funder predators were looking to exploit a nonfinancial corporation that needed loans as it faced distress caused by a global pandemic and economic crisis, and the Fed intervened and offered the nonfinancial corporation a better deal. From my perspective, there are no presumptive good guys in distributive conflicts between nonfinancial capital and financial predators. But it’s not obvious to me why we should shove more firms like Carnival closer to bankruptcy—and threaten to extinguish even more jobs than have already been destroyed—just to allow hedge fund vultures to reap the benefits of having their predatory loans be Carnival’s only option.
The Fed was actually founded in 1913 precisely to serve as a public lender of last resort that could give nonfinancial businesses an option for obtaining loans for survival without throwing themselves on the mercy of Wall Street. In very real terms, the Fed was created so that J.P. Morgan (the person, not the bank) wouldn’t get to decide who did and did not survive financial panics, and wouldn’t get to decide the price of this survival. The Fed experiment as a public service to break the power of private financial capital has not gone without a hitch in the century-plus since its founding, but, during the crisis, it seems to me that it’s mostly going how one would want.
Rising stock prices are not proof that the Fed’s actions are malign or misguided
It is often pointed out that share prices of nonfinancial corporations rose after the Fed announced its lending programs. Given that most stock is owned by the already wealthy, this seems like prima facie evidence that the Fed’s actions have helped the rich, no? Yes, but, while wealthy households own most of any companies’ stock right now, they also will be the buyers of that stock eventually, and so policy actions that raise stock prices reduce the future rate of return. In short, the real distributive conflict between a lower and higher share price for Carnival isn’t really between rich and poor (who will never own this stock), it’s between today’s rich and tomorrow’s rich. Further, as a spillover potential benefit, the more generous loan terms offered by the Fed (relative to other sources of capital) will likely keep many companies in business and avert layoffs of typical workers.
The Fed can do more at the margins—but its existing tools are too weak to provide the help typical families need—it’s up to Congress and the president now
I’ve already noted that Carnival is hardly a sympathetic company. It has a terrible record on labor and environmental standards and bungled its obligation to provide safe accommodations for its passengers during the coronavirus pandemic. It may well be the case that all of this means Carnival shouldn’t exist as a company. But policing these things is a job for labor, environmental, and health authorities, not the Fed. The proper tool for doing this policing is transparent and consistently enforced regulation, not decisions—made on the fly during a meltdown of the economy—that the company should not get access to financial support being widely offered to other firms.
This theme that the Fed can’t be held responsible for all aspects of economic policy is an important moral of this story. It is absolutely true that we as a country have not yet done nearly enough to ensure that human misery and economic suffering are minimized in the wake of this recession and after. But this is on Congress and the president. They have the tools—fiscal policy measures such as stimulus spending—that can provide relief and recovery at scale and targeted toward typical families. In moments like this, the Fed’s official tools really can only keep financial predators from exploiting the vulnerability of nonfinancial corporations and provide a very modest across-the-board stimulus to economic activity once it starts again.
Has the Fed utterly maximized the modest help it can provide? Not quite yet. It should lower interest rates on loans offered to state and local governments, extend these loans’ maturities, and make them more broadly available to cities and counties. Unofficially, Fed leaders can jawbone Congress to be better—and they’ve largely been doing this.
The Fed has shown more concern and intelligence than other branches of the economy policymaking apparatus for more than a decade now. Because of this, and because the Fed is not hobbled by the filibuster or other things that hamstring fiscal policy, it is not surprising that many want the Fed to be in charge of crisis response generally. And when the Fed doesn’t do things that many think (rightly) should be part of this general crisis response, people get mad. But this is not the Fed’s fault. The Fed lacks the legal and logistical capability of delivering aid more directly to households. Would it be nice if the Fed one day had this capability? Sure. But Fed leaders don’t have it today. And in the meantime, it’s better that they use the frustratingly weak and indirect tools they have available to them rather than do nothing.