Nomi Prins: Don't let big businesses take advantage of the COVID-19 crisis
Big corporations are using cheap rates and Fed facilities to borrow and receive assistance, while making no guarantees to rehire workers
In late 2019, the U.S. Federal Reserve stepped in with another phase of balance sheet growth using REPO operations, a form of short-term lending between big banks and their big corporate clients. Even with $4 trillion worth of deposits between the Top 4 American banks, they required that help.
The result was an inflation of the Federal Reserve balance sheet to $4.1 trillion by the end of 2019. The Fed also pivoted back to easing mode in 2019 to supplement the slowing down of GDP growth, which by the end of 2019 was 2.3 per cent, versus 2.9 per cent in 2018.
Central banks around the world took that same cue and some 60 per cent of them pivoted from tightening to easing in 2019. The debt in late 2019 for the world was three times GDP. For every $3 borrowed, only $1 of real economic activity occurred. That’s how we started 2020. Throw in a pandemic, acute shutdowns, uncertain re-openings and re-closings, and we’re in for a long, drawn out financial and economic crisis.
However, the financial side has done much better, as exemplified by the $2-trillion increase in big bank deposits since the pandemic began and the disproportionate availability of sustenance through the Fed’s 11 facilities. This is why the stock markets hit quarterly high percentage increases and the NASDAQ is at an all-time high, while Main Street’s economy is nowhere near that capacity.
This means all the new debt created is even cheaper than the debt created in the wake of the 2008 crisis. More debt, more cheaply, means less incentive to repay it and more incentive to push it down the road. We have to be concerned that the banks, already over leveraged, are using this situation to push off some of their constraints around the riskier types of assets they are allowed to buy.
Meanwhile, the foundational economy, including the dire unemployment situation, is still in a state of shock. I call this a permanent distortion, because the disconnect between financial assets, equity markets and the real economy has now become irreversible.
There will be an endless supply of artificial stimulation to Wall Street, with less money deployed to the real economy, small businesses and people. The bigger that gap gets, the greater the likelihood of another financial crisis on top of an existing economic recession or depression.
Big corporations are using cheap rates and Fed facilities to borrow and receive assistance, while making no guarantees to rehire workers. We need to rejigger this entire concept and put that investment into real infrastructure development, sustainable social programs and the retooling of the labour force — not into the purchasing of equities and corporate bonds.
https://munkdebates.com/podcast/big-business-bailout
podcast debate. https://www.theglobeandmail.com/arts/jig-rejig-and-jiggery-pokery/article751033/
It derives from the 16th-century use of "jig" to mean a trick or deceit; the ruse has been discovered. Even so, the jig as trick may have got its name from the frenzy of the jig as dance, suggesting sleight of hand or a furious movement that makes it hard to tell exactly who is doing what.
https://www.brookings.edu/research/fed-response-to-covid19/
Nomi Prins closing statement of the FED debate:
I think though it was necessary to help an economy that had stopped and to help liquidity be provided to the financial markets but through banks to small business to individuals, which would have been the better way to proportion it, although that's not what happened; with the fed almost doubling its balanced sheet between 3.7 trillion last year to 7.1 trillion so far this year with potentially up to 10 trillion to go; without the accountability of where that capital flows and us seeing. In fact where it is flowing into riskier assets and into equities, which acerbate inequality; they acerbate the future potential of that risk to be incurred by both the financial system and therefore also the general economic system, that that is a problem. I think we should have been more strategic in terms of both the FED response and the fiscal response because they were done at the same time and they DID disproportionately go to the larger corporations; the benefits went to the wealthier individuals. And although they also went to small businesses and also benefits helped individuals that didn't have anything to begin with, that we could have done that in a different way. The Mainstreet Lending Program from the Federal Reserve that was designed and narrated in order to be able to do has not really been utilized and hasn't therefore been effective. So think going forward we need to calibrate the accountability of where's capital available and where it goes; be more strategic about it, consider the foundational economy, the mainstreet economy, individuals who are affected disproportionately from the stoppages in their own personal economies and we need to proportion back and plan back in order to grow that foundational economy, reduce inequality and allow more of the work force to participate in economic recovery and positivity.
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