The USA is too big to fail

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at:, or follow me on Twitter.

The USA economy has changed dramatically

While the Fed says it does not seek to keep stock prices up, the market has rebounded some 30 percent since the institution began its giant program to pump trillions of dollars into financial markets. It has bought billions of dollars’ worth of U.S. Treasury bonds and government-insured mortgage bonds, keeping the prices of those bonds up and pushing yields, which move in the opposite direction, down.

The Fed also announced recently that it would start to buy exchange-traded funds that hold a diversified portfolio representing large parts of the more than $9 trillion corporate bond market and would move on to buying corporate bonds directly “in the near future.” Since such bonds serve as the basis for new borrowings, this lowers the cost of raising money for corporations tapping the bond markets.

“In this cycle, it is not a specific institution that is too big to fail — it is the investment-grade bond market that is too big to fail,” Scott Minerd, global chief investment officer at Guggenheim Partners, which has more than $200 billion under management, wrote in a recent client note.

The government has also earmarked enormous sums for certain industries. Airlines could receive some $50 billion in loans and aid in the $2 trillion CARES Act. The law set aside around $17 billion “for businesses critical to maintaining national security,” a pot widely seen as being intended for the aerospace and military giant Boeing, which was struggling even before the coronavirus all but halted air travel. (News of the backstop ultimately helped Boeing avoid taking government money, as investors were more confident about lending it money in the bond markets.)

These sorts of government actions produce strong feelings, especially among those who say the sink-or-swim discipline of markets that operate without government support leads to a stronger and more dynamic economy. Government involvement risks creating a generation of zombie companies too weak to succeed without Uncle Sam’s help, the argument goes, and interferes with the process of destruction and innovation that makes capitalist economies productive.