In the face of the COVID-19 crisis, Congress offered up a $2.2 trillion package in March. It was sold to the public as a means of providing necessary relief for the millions of Americans, businesses, and hospitals. This, the biggest economic stimulus package in United States history, was passed unanimously by the Senate and near-universal support in the House. It provided for $1,200 cash payments to many Americans; $150 billion to help the healthcare industry; $500 billion for state and local governments and companies; and $350 billion in loans and assistance for small businesses.
One should take note that in mid April Congress was back at it, authorizing $484 billion of additional loans and assistance for small businesses. Had they miscalculated originally? Nope. It came to pass that at least 200 publicly-traded companies and even some foreign-owned firms secured S.B.A. funds before the first batch of money Congress allocated to the program ran out in early April.
In the case of the average worker, it is pretty clear that Congress failed big time. As of this week, we have ~35 million people out of work. The Bureau of Labor Statistics reported a median personal income of $865 weekly for all full-time workers in 2017. Imagine if we had just inverted payroll for those folks. They get furloughed by their company, then we pay them their pay directly each week until the furlough ends. If that were to go on for 1/2 a year we would have spent around $790 billion. If it had to go on for a whole year, we would have spent around $1.6 trillion.
Either way, a minimum of $1.2 trillion less than the Congress giveaway for which, we, the tax payers will still have to pay, mind you. Making matters worse, we are going to also pay for unemployment for all these folks on top of the $2.8 trillion we just whipped through. Wall Street and their bought-and-paid-for representatives in Congress have fleeced Main Street again. Worse, they are using Main Street’s (our) money to do it.
“Wait!” you say, that package also helped bail out the companies whose bottom lines are unfairly impacted by this pandemic. I think that case can be made for the hospitals and others providing direct care to COVID-19 patients. For the airlines, cruise ships, hotels and others, the case is less clear.
The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy in the case of a public company means that shareholders typically get wiped out and the secured creditors (and employees) end up owning most of the company. In private companies it tends to be the secured creditors.
Please note: bankruptcy does not mean a company disappears. Simply, it is now just owned by someone new (as has occurred many times previously in the history of American companies). Bankruptcy sets out to punish those who took excessive risks while preserving those aspects of a businesses that can potentially return to profitability.
A bailout simply transfers enormous wealth from taxpayers to those who knowingly engaged in financial risk. In truth, bailouts can (and have) encouragde companies to take large, sometimes imprudent, risks all the while counting on getting bailed out by government in the end. Known by economists as “moral hazard” it generates enormous distortions in an economy’s allocation of its financial resources.
Thoughtful advocates of this bailout might concede this perspective, but they will continue to argue that this COVID-19 bailout was necessary to prevent complete economic collapse. This view has a grain of truth; if the bailout had not occurred, more bankruptcies were certainly possible. That said, it is not clear to me that these companies won’t need further bailouts if there is an uptick in disease rates in the states who are not following CDC guidelines.
The lie purported by Wall Street is that bankruptcies shouldn’t be used. But it makes sense to remember that when a company fails, it does not immediately fire its employees. Instead, it uses a packaged bankruptcy. The pensioners and the employees of these companies often end up owning more of the company.
So, who loses? Interestingly, the speculators who owned the unsecured tranches of debt or the folks that had large speculative equity positions, they are the biggest losers. In other words, the people most likely to be hurt by a bankruptcy are going to be hedge funds that serve a bunch of billionaire family offices. You know, the same people who consider themselves the most sophisticated investors in the world.
Long Term Capital Management anyone?
Just maybe, because they have used our tax money through their bought-off elected officials, they are in fact the most sophisticated investors in the world. Meanwhile we have ~35 million people wondering how they are going to meet their own financial obligations in the coming days, weeks, and months.
People should be mad enough to call their congressional representatives. But, do they even know what has happened to them? You can help do the following:
(1) Share this blog post with others.