On the list of things that the government should not do, there must be a spot for the $750 billion corporate bond buying that is slated to begin this month. Under the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF), the Fed will lend money to the US government, which will make the appropriate bond purchases. Whether the Treasury will enlist the help of the best bond traders from Wall Street to actively trade in the market or whether a simple buy-and-hold strategy will be employed has yet to be seen. But this is what we know from this week’s press release, courtesy of the New York Fed:
the SMCCF is expected to begin purchasing eligible ETFs [exchange-traded funds] in early May. The PMCCF is expected to become operational and the SMCCF is expected to begin purchasing eligible corporate bonds soon thereafter.
Per the Federal Reserve, the PMCCF program is supposed to “provide companies access to credit so that they are better able to maintain business operations and capacity during the period of dislocations related to the pandemic,” while the SMCCF program is designed to “support credit to employers by providing liquidity to the market for outstanding corporate bonds.” These explanations sound both nebulous and temporary, so we will continue to monitor their development.
There are consequences to having a government buy and ultimately sell corporate bonds, such as artificially increasing bond prices, increasing the money supply, and effectively subsidizing certain corporations at the expense of taxpayers. An exhaustive list would be a laborious attempt to show what many policymakers appear not to know. Although it is important to factor in the immediate consequences, we must also consider one very important question: When will this end for good?
Whether or not the bonds are repaid or the securities successfully traded is not as important as the fact that once the program starts, it could become a permanent monetary tool for the Fed. Even worse, if the program is considered a success, it may lead to a wider acceptance of government ownership of other assets to be funded by Fed lending facilities.
To gain insight into these asset programs’ potential future, we can look at the European Union, whose central bank interventionism is more advanced. On Tuesday the German Federal Constitutional Court ruled that the European Central Bank (ECB) has three months to carry out a “proportionality assessment” of its now €2 trillion public bond program, known as the Public Sector Purchase Programme (PSPP), which began in 2015. Upon review of the assessment, the German court may block the ECB from buying German bonds due to a potential breach in the constitutionality of the asset program. In what can serve as a sign of things to come, the court said that:
the PSPP lowers general interest rates, it allows economically unviable companies to stay on the market. Finally, the longer the programme continues and the more its total volume increases, the greater the risk that the Eurosystem becomes dependent on Member State politics as it can no longer simply terminate and undo the programme without jeopardising the stability of the monetary union.
Even more inspiring than the ruling is the fact that the complaint was originated, as the Financial Times noted, by 1,750 people, led by German economists and legal professors!
Considering how many economic and legal professors there are in America, one would think that a significant number of them would consistently challenge the Fed and the government on issues such as multitrillion-dollar bailout programs, or at least make a concerted effort to enlighten the public on the government’s anticapitalist endeavors. Sadly, there seems to be little desire for the “experts” to bring this to the public’s attention, even though the public is liable to pay for these programs without ever consenting to them. If not academia, who will stand up against these borderline unconstitutional actions, which are nearly impossible to wind down once they begin?
