Amit Seru and Luigi Zingales write,
The need to help individuals and small firms has provided cover to the largest corporate subsidy program in U.S. history. Under intense pressure from lobbyists, the Cares Act allocates $510 billion to support loans for large businesses. A small chunk of this money ($56 billion) will be used directly by the Treasury to grant loans to airlines and other “strategic” firms (read: Boeing). The Treasury will then confer the rest ($454 billion) to the Federal Reserve to absorb losses the Fed might incur in lending to firms in the private sector.
The expectation is that the central bank will leverage this money 10 to 1, enabling it to lend up to $4.54 trillion to companies. That sum is more than all U.S. commercial and industrial loans outstanding at the end of 2019 ($2.35 trillion) plus all the new corporate bonds issued during 2019 ($1.41 trillion). Thus, if this capital is all deployed by the Fed, and at rates that will surely crowd out private capital, all capital allocation in the U.S. in 2020 will be done by the Federal Reserve System, not by the capital market.
Their recommendation is for more transparency and oversight. Really? Our country has switched to an economic system somewhere to the left of Bernie and barely to the right of Lenin, and you would be satisfied with transparency and oversight?
I applaud Seru and Zingales for coming forward to point out the radicalism in the CARES act. But it requires a more radical response.
More like the CARELESS Act
Even more like the CAREFREE Act
Still a better process than the Nixon Shock. At least Cares has a bettable future, it is not overnight.
Mechanically, most of the losses other than the 500 billion fall back on Treasury in the form of government debt. That mean a $200 billion seigniorage fee to Treasury every year for about five years. It will be passed down to retail banking.
But it is a known, five year process. It is not something dreamed up at midnight and executed the next day, like Nixon changing the monetary regime. This plot looks a lot like a chaotic version of Dave Beckworth’s Fed target proposal. What Dave inserted were tiny helicopters one could bet on, the key being able to bet them. Betting future events smooths things out in the value chains.
Here are some point.s
Total medical activity is down for the year, deaths are dropping from all causes, (except corona) very fast. I am not worried about virus costs, I worry about idiosyncratic medical shortages due to having a sudden reorganization of the medical value chain.
Total government debt (or its interest expense) is not going to be paid, the millennials can assure us of that. So I am taking the $500 billion in loss allocation above and making that 5 trillion over 15 years to meet millennials demands.. That is my low ball offer.
That is my Nixon Shock and results in about 2% direct inflation, I mean a random process that automatically deletes some portion of its government bond holdings.
Great idea.