For this, there will be hell to pay
I still remember all of the signs of seething public anger. A TV rant against the bailouts that went viral. Voters venting against their representatives in town halls. Kids showing up to occupy a strangely named park. It was the period after the last financial crisis, and people were pissed. Not so much about the housing crash — that was accepted as the inevitable consequence of a speculative binge that consumed everyone from their neighbors to Lehman Brothers. No, what most people were angry about were the proposed solutions.
Somehow, those who benefited the most on the way up would suffer the least on the way down, while those barely hanging on would be allowed to drop into the economic abyss. Somehow, CEOs who called on Washington got generous bailouts while borrowers who called a helpline only got a busy signal. The banks were saved, but only to go on pushing foreclosures (and paying bonuses). Cheap financing was made available, but most of it got taken up by the people and companies who needed it least. Individuals who lied on a single mortgage application were jailed, but executives who lied on a thousand were promoted.
All of that anger eventually metastasized into the political movements we recognize them as today: Tea Party cum Make America Great Again, and Feel the Bern nee Occupy Wall Street. Despite their differences, the populist movements of the right and the left can be traced back to the same original sin, and a lingering suspicion by many since the last crisis that the system is somehow rigged. That suspicion can now be removed entirely. Of course the system is rigged. The proof might not be in the headlines, but you can see it in the fine print.
Last Friday's dismal jobs report, and the exuberant market response, were the crowning achievements of a broken system. Somehow, the fastest main street collapse in economic history was perceived as a positive by Wall Street. And no, this wasn’t some temporary market rebound after a brutal decline. Stocks have been rallying for over a month and are not only significantly off their lows but higher than they were a year ago. Some stocks are even up on the year, meaning the investors who bought them long before ever hearing the word coronavirus have net benefited from the resulting decimation.
The experts, many of whom are also befuddled by this dichotomy, offer various explanations. “The economy is bad, but it’s set to rebound” they say, or “the market is mostly made up of tech stocks, and tech is the clear winner here.” These are not convincing arguments. They are after-the-fact justifications of a shocking new reality. Assets do not appreciate in value because an unexpected and terrific shock is only temporary, and the biggest corporations in the world don’t win from a 30% collapse in GDP because “the internet.”
Amazon is not Zoom and Apple is not Clorox. These are massive businesses that touch every corner of the economy, so they can’t only benefit from record unemployment. For every shelter-in-place practitioner ordering delivery from Whole Foods there are two unemployed waiters no longer buying new shoes from Zappos. For every two AWS clients increasing usage because of remote work one is about to go out of business. Among the 30m people who are newly unemployed, some will not be in the market for a new iPhone.
Shares of Amazon and Apple are both higher than where they were when they released their first post-pandemic earnings reports a few weeks ago, but not because management announced great numbers. No, to understand what’s really happening here, and to fully appreciate the magnitude of the populist uprising to come, you have to look at the fine print.
What’s happening here is the same thing that happened a decade ago. Back then, the powers that be responded to a crisis that resulted in millions of people losing their job and their home by lowering interest rates and flooding the system with money. They did this knowing that not all of that largess would reach the folks who really needed it. The unemployed and recently foreclosed upon don’t qualify for a loan — at any interest rate. Just because a company is bailed out doesn’t mean it won’t turn around and lay off workers. Subsidizing house prices doesn’t do anything for the millions of people who now have to rent (although it does wonders for luxury condo owners in Manhattan). Helping the rich to help the poor mostly ends up growing the wealth gap. That’s an idea so simple that even an economist should be able to understand it. But alas, that’s giving them too much credit.
The same cycle is now repeating itself, except that this time, everything is happening bigger and faster. Back in 2008, it took most companies years to start taking advantage of the Fed’s lowered interest rates to juice their own shares. Apple was one of the last to introduce the practice because Steve Jobs didn’t believe in it. But this time around, the company didn’t even wait for the ICU wards to fully clear out.
The company just took advantage of the Federal Reserve’s kitchen sink attack on the corporate bond market to issue $8b in bonds — but not because it needs the cash, or is about to go on a hiring spree, or plans to move production back to the U.S., or wants to donate iPads to hospitals. No, the world’s third biggest company by market cap took advantage of the Fed’s “stimulus” in order to reward its shareholders. That’s great news for Tim Cook and Warren Buffet (both billionaires), and the hundreds of hedge funds that own the stock (who by law can only serve millionaires), and your wealthy neighbor who is max long in his retirement account. But you know who it’s not great for?
This is not an accident of history. It’s not a phenomenon that one couldn’t see coming, and it sure as shit isn’t capitalism. It’s history repeating itself. It’s the top down rigging of the economy to a shocking degree. Corporate borrowing costs are supposed to rise during a crisis in order to enforce discipline for the tough times ahead. Higher rates remind management to save and punish those who didn’t. That’s not a bug, it’s a feature. It’s no different than parents who withholds allowance when their kids are slacking at school. It’s for their own good.
But central banks no longer allow this cycle to play out — because the middle class! But if they really wanted to help the middle class (or the unemployed, or healthcare workers, or those who lost a loved one to the disease) they would just help those people. Instead they are doing what they’ve always done, with predictable results. Apple might get to borrow billions of dollars here, but countless small and family-run businesses on the brink of collapse don’t have that luxury. Does anybody have a problem with that? Apparently not.
Sure, there are piecemeal programs designed to help the “little guy,” but the dollars involved are trivial compared to the amounts being gobbled by the behemoths. The Federal Reserve has printed over two trillion dollars in the past few months. To see who didn’t benefit, read the fine print.
Back when I started arguing against these programs a decade ago, the most common argument I heard back was that doing nothing would have led to another great depression. That part I agreed with. At issue wasn’t the act of the government doing something, but rather the policies chosen. I think the justification for action is even more now, because the economic victims of the shutdowns have done nothing wrong. But the issue now is still the same it was back then: free money mostly benefits those who can get it, as opposed to those who actually need it. I was not surprised back then by the fact that such programs resulted in a significant expansion of the wealth gap. But I was surprised by the lasting impact they had on politics.
The one thing the failed leadership of that era had going for it was that it could at least pretend to not realize the consequences of its actions. Today’s leaders have the benefit of hindsight, but heave doubled down anyway. Even more shocking is the fact that belief in this one failed idea seems to be a bipartisan affair. Democrats and Republicans don’t agree on much, but they do agree that the best way to help the innocent is by bailing out the reckless.
For this, there will be hell to pay.
