Welcome to Crony Capitalism 2.0, brought to America by the Trump administration and the COVID-19 pandemic. Washington’s current approach to rescue the economy has made investors in stocks and bonds whole, even as incomes fall for most Americans. Now, only Congress can lessen that injustice — and the suffering of millions of people — only by going big. Until the crisis ends, everyone who needs them should receive checks from the government every six weeks, the expanded jobless benefits should stay in place, and small businesses that need another round of payroll supports should get them.
For the top 10 percent of American households that own 91 percent of all financial assets, the economic impacts of the pandemic crisis are virtually over. After an 11-year bull run for stocks, the S&P 500 reached a historic high on February 19, 2020 and then slid 34 percent as the economy fell off a cliff in March and April. Yet even as GDP was falling sharply throughout the second quarter (April-May-June), the S&P 500 was back within five percent of its historic high by June 8. Five weeks later, as COVID-19’s second spike spread across much of the country, the S&P 500 was barely three percent off its record high on July 22.
The story is much the same for corporate bonds. The largest fund for investment grade corporate paper, the LQD “Exchange Traded Fund,” or ETF, peaked on March 6 before falling 22 percent over two weeks. By July 15, it had regained all of that ground and set a new record high. It has since continued to rise. The gravity-defying recovery of non-investment grade or “junk” bonds, issued by companies already in deep trouble before the pandemic, is even more remarkable. As expected, the largest ETF for junk bonds (HYG) lost 29 percent of its value from February 20 to March 23—and then erased 95 percent of those losses by June 8. As businesses re-closed in many states, junk bonds on July 22 were less than three percent below their February high.
For everyone else, the most recent data show that personal income from wages and salaries from March through May fell three percent after taking account of the assistance Congress passed in the April CARES Ac. That’s despite the checks to households, the PPP support for small businesses, and the expanded unemployment benefits. Setting aside those transfers, wage and salary income plummeted a record-breaking 7.8 percent, equivalent to an average pay cut of $4,831 for a median-income household. Given those sober facts, Congress should be prepared to provide more rounds of all of the financial assistance for average Americans until the crisis passes. Otherwise, tens of millions of households will face historically hard times.
We’ve been here before. The government’s response to the 2008 financial crisis followed a similar path. That time, Congress and both the Bush and Obama administrations spent trillions of dollars to stabilize capital markets—good for investors but also the right move for everyone. They also spent hundreds of billions of taxpayer dollars bailing out financial institutions and their shareholders. Most disturbingly, they virtually ignored the crisis in housing markets that cost millions of families their homes and left tens of millions of households poorer.
Then, as predicted, stocks began to turn around by August 2009 and fully recovered by early 2011. The value of people’s homes, the primary asset of nearly two-thirds of all households, fell for five more years and did not fully recover until 2018. Combined with the Great Recession, this left most Americans less well-off, so they spent less and business investment was sluggish. All of that produced the slow and uneven recovery that eventually helped elect Donald Trump.
Today, much like the last time, the extraordinary measures used to boost the stock and bond markets are unfolding in plain sight. But since the main mechanisms are the esoteric operations of the Federal Reserve, it’s hard for most people to sort them out. It’s actually pretty straightforward, though. From March through June (our latest data), the Fed flooded the financial markets with capital by buying up $2.8 trillion in Treasury and agency mortgage-backed securities and some corporate bonds. These purchases enabled banks to vastly expand credit in the form of loans to businesses at easy terms and large stock and bond purchases by institutional investors. The official term for this approach is quantitative easing (QE), operations pioneered by the Fed for the last financial crisis and used again now — but now on steroids
The current purchases have increased the Fed’s total holdings by two-thirds over four months, documented in the Fed’s public balance sheet: From March 2 to June 30, the Fed’s assets (the securities it purchased) jumped from $4.2 trillion to $7.0 trillion. For a sense of the scale of these operations, the Fed’s QE purchases in the first four months of the 2008 crisis totaled $1.4 trillion, or half as much. Adjusted for inflation, the QE operations from March to June this year outpaced those in the first four months of the financial crisis by $1 trillion.
The Fed has gone even further to support bond investors by declaring its readiness to directly buy the corporate paper. While the Fed’s actual purchases of corporate bonds have been small, its pledge to support the market for those bonds stopped the normal downward pressures on their prices, especially for junk bonds. That’s why private investors have dived back into that market and bid up the prices of corporate bonds to nearly their recent historic highs. And many of the country’s biggest corporations are taking full advantage of this implicit government guarantee for their debts: The New York Times reports that through late June “giant U.S. corporations had borrowed roughly $850 billion in bond markets this year, double the pace from last year.” Their shareholders will accrue most of the benefits.
In any economic meltdown, the government has to support the country’s capital markets. It should surprise no one that the Trump administration has gone about it with no sense of equality or proportion. With investors already made whole, Congress should look out for the millions of Americans now facing effective bankruptcy and the hundreds of millions more looking at hard times, perhaps for years and through no fault of their own.