What The Fed Can Do: Print And Buy, Buy, Buy

Summary

• Everyone with a pension fund or 401K invested in stocks better hope the Fed becomes the buyer of last resort, and soon.
• Much has been written about what the Federal Reserve cannot do: it can't stop the COVID-19 pandemic or reverse the economic damage unleashed by the pandemic.
• But let's not overlook what the Fed can do: create U.S. dollars out of thin air and use these dollars to buy assets either directly or through proxies.

Everyone with a pension fund or 401K invested in stocks better hope the Fed becomes the buyer of last resort, and soon.

Much has been written about what the Federal Reserve cannot do: it can't stop the COVID-19 pandemic or reverse the economic damage unleashed by the pandemic.

But let's not overlook what the Fed can do: create U.S. dollars out of thin air and use these dollars to buy assets either directly or through proxies.

Let's also not overlook how much the Fed can print/buy. The Fed's balance sheet currently stands at $4.24 trillion. Doubling this to $8.5 trillion would bring the balance sheet to 39% of U.S. GDP ($22 trillion) and 7.5% of total U.S. household assets ($113 trillion). In the context of GDP and household assets, doubling the balance sheet would be extraordinary but not destabilizing.

Note how the the Fed's balance sheet remained flatlined for 10 weeks and only popped higher this past week:

12/25/19: $4.165 trillion
1/1/20: $4.173 trillion
1/8/20: $4.149 trillion
1/15/20: $4.175 trillion
1/22/20: $4.145 trillion
1/29/20: $4.151 trillion
2/5/20: $4.166 trillion
2/12/20: $4.182 trillion
2/19/20: $4.171 trillion
2/26/20: $4.158 trillion
3/4/20: $4.241 trillion

Why would the Fed double its balance sheet? One reason would be the Fed moves from being the lender of last resort to the buyer of last resort, that is, the buyer of iffy assets no one else will buy such as junk corporate debt and junk bonds.

Why would the Fed become the buyer of last resort? To keep the entire financial system from collapsing under the weight of junk debt and fast-evaporating collateral.

Much has been written about the divide between financialized assets and the real economy, including many posts on this site. The financialization of the economy has richly rewarded the top 10% at the expense of the bottom 90% (and rewarded the top 0.1% at the expense of the top 10%), and this has generated socially and economically disruptive wealth and income inequality.

But even as we decry the widening gap between the financial sector and the real-world economy, we have to deal with the reality that the entire economy has been financialized and is now dependent on debt, leverage and asset bubbles.

If the stock market drops 50%, that wipes out pension funds, 401Ks, and mountains of leverage.

In other words, the Fed has to save all the asset bubbles to save the real-world economy which is now dependent on the excesses of financialization that have enriched the few at the expense of the many.

Everyone with a pension fund or 401K invested in stocks better hope the Fed becomes the buyer of last resort, and soon, as once stocks crater 50% or more, there's no way to recover the $16 trillion that evaporated, or stop the dominoes from falling.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[bixbubba]

Have you read the federal reserve act? The Fed can't buy stocks or commercial bonds.

[Maga infinity]

Fed should step in and buy equities.

[Salmo trutta]

The U.S. Government is broke (private savings won't cover the deficits). The FED must step in to peg interest rates and monetize the deficits. Get used to it.

[GestaltistView]

Mr Liberman - I would have preferred NOT to have seen the counterfactual ie an economy without it... The Eurozone was VERY SLOW to implement QE and it caused several years of pain...

[Mr. Liberman]

I have no issue with QE when we are in a big recession. Why are we talking about QE when the stock market goes down 15 percent? We haven’t even seen the effects of coronavirus financially and were already getting ready to bail out Wall Street. The euro zone is still a nightmare because nothing has changed since 2008. People need to learn how to be responsible, if the government acts as a casino where you always win, that’s not free market and capitalism. That’s basically just bailing out rich people and no risk investments

[Vinci1452]

Bill Kristol:

Congress:
1. No bailouts for industries.
2. Targeted help for hospitals and the health care sector.
3. General relief directly to workers and families. The owners of capital have had a good decade and can weather a downturn; it's labor that deserves a strengthened safety net.

[PreCambrian]

So apparently you are a fool if you don’t participate in this financial charade. No more “risk” takers, everyone wins in the government backed casino.

[Lawrence J. Kramer]

Granularity is crucial to policy analysis. In 2008, the Fed defended the reputation of our financial system, which was defaulting on highly rated paper and, therefore, unable to issue more of it to good borrowers. That rescue did not "socialize risk," as its opponents liked to claim. In contrast, paper sold as junk should be in the hands of risk-takers. Risk takers take risks. The Fed has no reason to bail them out and every reason not to.

When a junk bond issuer defaults, Chapter 11 is usually available to provide some recovery for lenders, often at the expense of equity holders (even bigger risk-takers), who are diluted by the reorganization. That's how the game is supposed to work. Things will have to get a lot worse before any kind of systemic rescue is justified, and, even then, risk-takers need to take haircuts reflective of the risks they signed up for. Otherwise, the entire risk-based capitalist system fails.

[Mr. Liberman]

Or we just take the haircut and learn from our financial mistakes and improve policy? Trying to boost the stock market has worked so well up to this point right?