Complaint Department: The Fed Buying Corporate Bonds

A few days ago, the Federal Reserve announced that it would buy a “broad portfolio” of corporate bonds, to go along with its ETF purchases.

Because of the Fed’s actions, corporations will be able to borrow at lower rates.

What could be wrong with that?

First, let me say that complaining about the Fed is its own genre of financial commentary. Some people elevate it to an art form. I usually don’t engage in it, because it’s unproductive and not conducive to making money.

Some commentators call the Fed an arsonist. If that is true, then go find some marshmallows.

Still, there is something about the corporate bond purchases that is a bridge too far.

Let’s think about what a Fed-free world would look like. Interest rates would be higher! Some corporations wouldn’t be able to service their debt and would go bankrupt. If companies went bankrupt, layoffs would certainly follow.

Isn’t this well-intentioned, to try to prevent millions of layoffs?

It may be well-intentioned, but the unintended consequences are horrifying. These are bad companies, and the longer they stay around, the more capital gets misallocated. We should want that capital to be allocated to better uses.

As for the layoffs, we have a dynamic, free-market economy, and people can get jobs somewhere else. For that matter, there is also unemployment insurance. I don’t mean to be glib, but we’ve long accepted this sort of thing as a possible consequence of capitalism.

Firms die, and new ones are born. This is how we achieve economic growth.

What the Fed is doing keeps zombie companies alive. Companies that should be bankrupt.

So far, the Fed has already manipulated the Treasury market, pushing risk-free rates lower, so everyone can borrow at lower rates—including you and me. People buy cars and houses that they ordinarily wouldn’t be able to.

So some people get to buy houses—what’s the big deal? That is also a misallocation of capital. Maybe some people have no business buying a house.

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Disclaimer: The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One ...

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