Never let a crisis go to waste? After former Chicago Mayor Rahm Emanuel uttered those famous words when he was the White House Chief of Staff in former President Barack Obama’s administration, every politician seems to have heeded the advice – Republican or Democrat.
President Donald Trump is weighing bailouts, handouts, and everything in between for companies that have been affected by the COVID-19 pandemic. With the federal government showing its hand to the economy and appearing ready to toss hundreds of billions of dollars to the private sector, every industry is looking to Washington for some type of financial assistance. The administration is weighing its options, and Trump has already laid out some pre-emptive conditions for any kind of Coronavirus aid, including buyback restrictions and executive bonuses. But there is another idea being floated: Federal equity stakes.
Larry Kudlow, the top economist at 1600 Pennsylvania Avenue, first discussed the idea that “if we provide assistance, we might take an equity position.” During a recent White House press briefing, the president revealed that he would be open to the government attaining an equity stake in companies receiving financial compensation.
The government, then, could become a co-owner of aerospace titans, airline juggernauts, and restaurant behemoths. Some experts aver that it might be the only way to plug the liquidity drainage occurring throughout financial markets. And proponents note that the U.S. government came out ahead more than a decade ago when it bailed out a plethora of major firms.
Kudlow was a vocal critic of bailouts back in the day, writing on CNBC at the time of the 2008 meltdown: “Call it Bailout Nation or Ownership Nation, it’s an unprecedented degree of government command, control, and planning, all in the name of a tough economic downturn.”
In this day and age, it is not uncommon for governments and even central banks to hold a minority stake in companies. The Bank of Japan (BoJ), for instance, is the top shareholder on the Tokyo Stock Exchange. The Chinese government has increased its investments in private companies to record levels, even before the Wuhan Coronavirus pandemic. Ditto for the Reserve Bank of India.
Would this be back-door communism for the U.S. government? It sets a terrible precedent, and it could trigger a series of unintended consequences for the free-enterprise system and free marketeers.
For years, the Federal Reserve has only purchased Treasurys and mortgage-backed securities as part of its aggressive quantitative easing blitzkrieg. The Eccles Building recently decided to expand its repertoire by delving into the troubling municipal bond market.
The central bank confirmed that it would extend its asset-buying efforts by acquiring short-term state and municipal bonds. The Fed says it wants to keep liquidity flowing through this market, which cratered during this month’s historic selloff as investors liquidated everything to build their cash positions.
The Fed will bailout the muni-bond market through the recently established Money Market Mutual Fund Liquidity Facility. The Boston Fed will lend to eligible banks that will then use single-state and other tax-exempt municipal notes as collateral. Maturities cannot surpass 12 months.
As expected, the response was favorable. The iShares National Muni Bond ETF (MUB) jumped as high as 2%, the Vanguard Tax-Exempt Bond Funds surged 2.3%, and the S&P High Quality Short AMT-Free Municipal Bond Index slumped 1.1%.
It is a remarkable decision by the Fed because it did not even take this action during the 2008 financial crisis. How much farther is the Swamp emperor willing to go to contain this market meltdown?
Finally, I would like to take a moment away from my weekly economic news reporting and analysis to give my gratitude to every single person in the private sector who is doing his or her part to help millions of people all over the world. The trucker hauling food, the nurse working double shifts, and the supermarket stockboy – you are the true heroes of today’s stressful times. You are putting yourselves in jeopardy every time you go to work. Your dedication ensures households have food, senior citizens are taken care of, and everyone remains calm throughout this momentous period. Indeed, this would serve as an important economic lesson in the division of labor, but it is better to instead focus on the human element at this time and to say one thing: Thanks! You have earned our admiration and appreciation.
As William Shakespeare wrote in Henry VI: “O Lord, who lends me life, lend me a heart replete with thankfulness.”
Read more from Andrew Moran.