AFP Writes: Fed’s Biggest Win? Bailing Out Subprime Companies
One of the quieter, yet most emphatic, successes of the Federal Reserve’s long-running easy-money campaign has been the way it has bailed out subprime corporate borrowers. It’s almost as if the Fed has made it “too hard to fail” for mid-sized to large companies with lower credit ratings.
By keeping short-term rates at zero indefinitely and exchanging a fresh $85 billion a month for Treasury and mortgage bonds held by banks and investors, the Fed has stoked investor risk appetites, compressed debt costs dramatically and loosened credit conditions for most decent-sized borrowers.
Junk-bond yields have fallen so far they no longer merit their longtime euphemism of “high-yield debt.” Junk benchmarks now yield around 5.7%, levels that high-grade companies used to be pleased to borrow at. Through most of the 30-year history of the modern junk-debt market, yields were in the double-digits, and in the panic of late-2008 they exceeded 20%.
I am beyond sick of this stupidity. This is equivalent to saying that the Federal Government has won the war on drugs by artificially lowering the market price of cocaine. No difference.
When will people learn that there is no free lunch in financial markets or anywhere else for that matter. Yes, the scheme might work for a while but when it eventually blows up the economic fallout from such a destabilization will be far worse than simply letting these “subprime companies” fail to begin with. We do not need to go far to see the outcome. This has already been tried by Japan since the early 1990’s where they have done anything they could to keep Zombie banks and companies alive by following the same idiotic rationale.
The outcome? Well, almost 25 years of deflation and an economy that went from one of the most efficient and powerful economies in the world to a shell of its former self. That is the outcome of economic stupidity. Now the same outcome faces the US Economy. Thanks a lot for your brilliance FEDs.
Did you enjoy this article? If so, please share our blog with your friends as we try to get traction. Gratitude!!!