Why a Fed/Treasury 'Lending Facility' Would Worsen the Problem
“What would I do? I’d shut it down and give the money back to shareholders.” – Michael Dell, commenting on a near-bankrupt Apple Computer in 1997
No companies ever run out of money. Ever. The most obvious example of this basic truth is Amazon. For the longest time the internet retailer was incredibly unprofitable, so much so that its nickname was Amazon.org.
Yet Amazon survived. Even though the Seattle-based company lost money for years, there were enough investors who trusted Amazon’s long-term prospects. So they continued to provide capital, and as the company’s market-cap makes plain, the true believers were amply rewarded.
Amazon's long path to profitability requires mention right now given the popular view among conservatives that the answer to an economic contraction of government’s own making is – you guessed it- more government. Hoover Institution scholar Kevin Warsh has prominently called for a Federal Reserve/Treasury created “lending facility” to boost liquidity within businesses rapidly descending on illiquidity. The editorial board of the Wall Street Journal, where Warsh has opined on the matter, supports his approach
The problem with such a plan is that it ignores why businesses are illiquid, or more realistically, it ignores what changes would have to take place so that they could be liquid again. Crucial about all this is that until those changes are made, throwing money at U.S. businesses will mean quite a bit less than nothing.
It will simply because the Journal’s editorial board has made very plain the why behind the sudden loss of liquidity. Per the editors, politicians on the local, state and national level have out of nowhere imposed “command-and-control” on the U.S. economy. Translated, they’ve overseen a shutdown of what was until recently the most dynamic, and easily one of the freest economies in the world.
It’s all a reminder that to focus on liquidity right now is to miss the point. Businesses once again never run out of money. What they run out of is trust on the part of investors that they’ll be able to operate profitably in the future. Taking this further, if investors trusted that politicians at all levels would soon take their booted feet off of the U.S. economy, the illiquidity troubling businesses would soon vanish.
Amazon is yet again instructive here. For the longest time it was bleeding money, but investors saw a better future such that they chose to liquefy an ugly present.
Looked at in terms of our 2020 present, the outlook for businesses is presently hideous. In that case, thank goodness market indices never price in the present, and thank goodness investors don’t. They analyze businesses in terms of their future ability to generate returns.
Since investors are future seeing, it’s easy to see what would cause them to re-enter the marketplace in order to liquefy U.S. businesses. They would have to have reasonable assurance that politicians at all levels aimed to cease their lockdowns.
One way to get this started would be for the Trump administration to take the lead. It’s often pointed out that President Trump has surrounded himself with all manner of supply-side, market oriented types. Since he has, they would ideally write the dialogue for the president to bring to the American people about how the federal government will end all actions meant to limit the ability of businesses to operate. As for the people who work in and are customers of those businesses, they’re all adults, or soon to be adults. They should be trusted to look after their individual well-being free of government decrees.
And for businesses suffering local and state dictation, the Trump administration should make a case that it views those efforts to limit commerce as the equivalent of a “taking.” Constitutional scholars will ultimately decide whether the “takings” line is true or not, but mere action on the matter from the Trump administration would presumably give businesses some breathing room of some kind during which time private, creative minds matched with capital will hopefully be able to come up with vaccine-style solutions to the virus that caused politicians to panic to begin with, and that led them to shut down the economy in the first place.
Some, including perhaps Warsh and the Journal’s editorialists, will argue that there isn’t time for these market-based measures, that businesses need money now. The obvious problem with such a stance is that the money will once again prove meaningless absent a cessation of what is a political suffocation of the businesses presently running on fumes.
Worse, this state attempt to blunt the message of the markets would at best achieve nothing, and at worse obscure the truth behind business illiquidity: political error. Which would be a shame. Markets are rapidly exposing political malpractice, so let them. Let markets speak loudly as possible so that the asphyxiation by politicians will stop.
After that, it cannot be stressed enough that what’s being proposed by Warsh and the Journal’s board would be economically harmful. It would be for two main reasons beyond the one explained in the previous paragraph. For one, businesses die all the time in a dynamic, market economy. Failure is a crucial source of economic vitality as the enormously high failure rate in superrich Silicon Valley attests. Along these lines, Journal editorial page columnist Andy Kessler has long made the point, including in his Journal column, that the failure rate in the Valley is 90%. This in mind, a blanket attempt by a Fed/Treasury “lending facility” to keep businesses afloat would, assuming a “successful” facility, keep in operation all sorts of businesses that market forces would have put out to pasture on their own, and to the economy’s betterment.
To which the Journal’s editorialists might reply that they’re calling for a lending facility to provide liquidity to “otherwise healthy businesses jeopardized by the pandemic shutdown,” but imagine if Covid-19 had reared its ugly head in the summer of 1997, or in the fall of 2001. Would Apple have rated Fed/Treasury finance, or Amazon, based on the Journal’s desire to only prop up the healthy? The question answers itself, and the answer explains why it’s so economically harmful to have government play the role of capital allocator. It can’t. Period.
The better stance is for wise minds to firstly acknowledge that that “lending facilities” are a non sequitur in consideration of what’s taking place. Businesses aren’t illiquid, rather investors don’t trust politicians to cease their shutdown policies.
After which something obvious should be acknowledged; something the Journal’s editorialists have been articulating daily: the carnage of the moment is a consequence of the sudden imposition of command-and-control. Why then, if government actors created the problem, would the solution from free-market types be to empower even more central planning of economic activity?