If Americans who understand what drives inflation and the boom-bust cycle in economics didn’t have reason to cringe at the monopolistic existence of the Federal Reserve, the newest wrinkle in that century old monstrosity just became clear.
And the only reason it might have been unclear to some folks is because, until Tuesday, June 16, the wrinkle was hidden behind a COVID19 bailout mask.
Monday afternoon saw the Federal Reserve Board unanimously vote do what many free market economists had warned since April that they would do, and on Tuesday, they acted, using a clause in the March 2020 “CARES” Act to directly buy corporate bonds.
On March 23, the Fed saw that highly rated bonds of major U.S. companies weren’t being traded for fear that even those companies would be forced to default on making their interest payments (due to COVID19 business lockdowns). And so the Fed announced its extraordinary plan to “back up” the bond market by saying it would buy up exchange-traded bond funds directly. In April, the Fed expFederal Reserve Literally Ready To Buy Corporate Bonds, Thanks To New “Super-Power” From CARES Actanded its authority into buying up junk bonds. And Monday’s announcement follows logically: The Fed will now buy up any bond (with certain limitations, of course, subject to change) of any company that appears to be in trouble.
Why is this bad?
Check that… Why is this a new poison, added to the already toxic existence of the Federal Reserve as monopoly money issuer, interest rate setter, U.S. debt-facilitator (through buying of U.S. debt instruments, which the U.S. pays back through taxes or more debt, repeating the cycle), and how is it even worse than the disastrous fact that the CARES Act already skirted the Constitution to offer $500 billion in loans to big corporations?
To understand, one first must grapple with the fact that since its inception in 1913, the Federal Reserve has replaced the U.S. government as the monopoly issuer of the currency we are “allowed” to legally use in what are supposedly “free market” exchanges.
Of course, if a government law mandates what currency you can use in trades, it’s not a free trade. And, of course, this currency control -- coupled with the federal government thirst for ready cash to fund its ever-expanding welfare and international “nation-building” programs -- sees the Fed’s issuing ever-increasing numbers of “Reserve Notes” (it has yet to prove what gold or assets it has on “reserve”), which inflates the money supply, sees early favorites such as big banks and the stock market get to spend the new cash before prices rise, causes reckless investments or the “boom” of the “boom-bust cycle”, and eventually creates artificially higher consumer demand relative to a slower upward productivity curve, which, in turn… leads to the bust.
And, of course, it’s essential to understand that even if the Fed didn’t exist, and the U.S. Treasury were the monopoly issuer of “legal” money, the Treasury would just print up more cash itself, duplicating the cycle. Only free market competition and competing private currencies can allow consumers to choose which currency they want to use, based on their evaluation of whether they think the currency is backed by something valuable.
Which brings us back to the monopoly of the Fed. Since we’re prohibited from using anything other than Fed notes as legal currency, the U.S. has given that banking cartel a lot of power to hand out cash and buy U.S. bonds, and now, with the CARES Act, the D.C. politicians have handed it a SUPER-power.
Mr. Adelman explains:
And so now the Fed announces that it will “begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers.” What this announcement does is encourage “zombie” corporations which couldn’t sell bonds because of their clear inability to service them to issue new debt which, with the Fed’s “backstop,” can now be considered investment-grade by Wall Street.
And THAT implies something very, very bad. It’s a poison apple, and it’s got a razorblade hidden inside for added destructive power.
We have a single entity given the monopoly on the issuance of currency, it can lend to all banks, buys U.S. bonds, and controls the interest rates, and now, it can literally buy debt instruments from corporations. It can create money out of nothing and, now, directly hand it to special corporations.
It also means that the Fed can buy bonds from governments other than the federal government, including bankrupt states, which means HUGE expansions of state spending, more cronyism, and more concentration on state government, rather than on private initiative and risk analysis, for business ventures – a powerful mix to inspire even more reckless business ventures and moral hazard mistakes.
And it also means that businesses involved in the long-standing field of credit rating will no longer be needed, because EVERYONE can get bailed out and pay back their debts with money the Fed gives them.
An economist can think of few things more inclined to inspire reckless business risks.
Previously, the moral hazard had at least some retardation in it because banks only had the Federal Deposit Insurance Corporation (FDIC) to inspire dumb lending (which led to a collapse in the housing market in 1991) and the loans they could get from the Federal Reserve, but now, businesses THEMSELVES can operate in the red just like the US government, issue bonds, see them purchased by the Fed, then, when they can't pay back, issue more bonds, and have them bought by the Fed – just like the US government. This also means that new start-up ventures that try to compete with the big, established businesses will have a hard time competing as independent companies and will tend to offer their ideas to established firms.
And it doesn’t stop there. As Nancy Marshall-Genzer notes for Marketplace.org:
The Fed is also making this program anonymous — just buying up corporate bonds without anybody asking it to.
That’s important to know. Unfortunately, she also, quite blithely, adds.
That avoids any stigma from companies requesting Fed help.
Actually, what it does is negate any possible hint of accountability and openness in what is clearly a crony-capitalist, aka, mercantilist, aka fascist economic system that has been created by the central government and now can run rampant, surreptitiously handing out fake, inflated money to friends, hiding their profligate and reckless business decisions, making insolvency impossible to detect, and, of course, artificially pumping up the stock market on an ever-flimsier and unsound set of so-called “fundamentals” that can be manipulated and tweaked by D.C. and the Fed at any time.
If Americans ever operated under the mistaken impression that they live and work in a free country, this ought to act as a bucket of cold water to wake them out of their dream.
Let’s conclude with this quote from Ms.Ganzer’s piece:
'There’s always a concern that if you’re looking to the Federal Reserve as opposed to the market for financing, that you might be revealing something about how desperate you are for financing,' said Kathryn Judge, a Columbia University law professor.
Which is the fundamental point. Participants in a FREE MARKET want and need to know if a business is “desperate” for financing. We need this signal information to decide where to invest our hard-earned cash as lenders in one-on-one deals, or through the stock market.
But, clearly, the politicians in D.C. and the Fed Board don’t want you to know.
Which, really, IS all you need to know about those people – the ones who command the corrupt system of collectivist US cronyism.