Who Needs Markets When You Have the Government Running the Economy?

Who Needs Markets When You Have the Government Running the Economy?

By Mark Nestmann • April 21, 2020

Last week, I described how former Democratic presidential candidate Bernie Sander’s call for socialist-inspired initiatives such as a guaranteed national income, ending foreclosures and evictions, and student loan forgiveness were now in effect nationwide.

But thanks to the possibly unnecessary shutdown of the American economy to fight COVID-19, we don’t only have socialism for poor and working-class Americans. We also have socialism for the rich.

The $50 billion bailout Congress handed to America’s domestic airlines last month, who in the last decade spent $43.7 billion buying back their own shares, is just the beginning. Congress and the Fed have also agreed to make US taxpayers shoulder trillions of dollars of bad debts belonging to international financial institutions and other multinational corporations. We’re now backstopping the global banking system as well as the bond market, including the junkiest of dodgy corporate bonds floated by perennially money-losing zombie corporations the Fed won’t allow to fail.

Here’s how this latest taxpayer-funded scam works.

The bailout package handed $454 billion in borrowed money to the Fed, which used these funds as “equity” to create a $4.5 trillion pool of capital to purchase distressed bank and corporate debt. The banks being bailed out, of course, are the same ones that since the last financial crisis have converted billions of loan loss reserves into profits through creative accounting. As with the domestic airline industry, most of these “profits” were used to finance stock buybacks.

Rinse and repeat, and you understand how the stock prices of the four largest Wall Street banks could rise an average of 343% from the depths of the last financial crisis to their respective high points in late 2018 to mid-2019. Now, they’re once again picking the pockets of American taxpayers.

While banks have “temporarily” halted share buybacks, they still have a big problem in the meantime. The Big Four Wall Street banks – JP Morgan-Chase, Goldman Sachs, Bank of America, and Morgan Stanley – have now reserved an additional $24 billion to hedge against future losses. But current estimates are that their real losses will be three to four times as much – up to $100 billion. At that point, of course, they’ll demand another bailout.

Socialism for the poor is a road to ruin, for the reasons I summarized last week. But so is socialism for the rich. All Congress and the Fed have done is to ensure that when the SHTF moment finally arrives, it will be even more catastrophic than it would have been absent their intervention.

In a free market, some companies make poor decisions or otherwise can’t compete and are forced out of business. Their shares become worthless and their assets are distributed to creditors. often in a bankruptcy proceeding.

That’s not the system we live in today. Instead, Congress and the Fed pick the winners and losers. And if you’re a big enough bank, hedge fund, or corporation, no matter how poorly you manage your business, you won’t be allowed to fail.

Venture capitalist Chamath Palihapitiya summed it up perfectly when Scott Wapner interviewed him on CNBC’s “Halftime Report” earlier this month.

Wapner: Are you arguing to let airlines fail?

Palihapitiya: Yes.

Wapner: But how does that make sense in the broader scheme of the economy?

Palihapitiya: This is a lie that's been propagated by Wall Street. When a company fails, it does not fire its employees...it goes through a packaged bankruptcy...if anything, what happens is the employees end up owning more of the company. The people who get wiped out are the people who own the unsecured debt and the equity...but the employees don't get wiped out and the pensions don't get wiped out…And if a bunch of hedge funds get wiped out, let them fail. So, they don't get the summer in the Hamptons - who cares?

When companies are permitted to shift the cost of their reckless behavior to taxpayers without adverse consequences, we shouldn’t be surprised when they do it. With Congress and the Fed calling the shots, what’s the point of calling the US a “market economy?”

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About The Author

Since 1990, Mark Nestmann has helped thousands of clients seeking wealth preservation and international tax planning solutions. He is the author of highly acclaimed Lifeboat Strategy and other books & reports dealing with these subjects.

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