Robert Brenner
THIS ARTICLE IS adapted from Robert Brenner’s article* in the May/June New Left Review, which is Part I of a two-part article on the economy. That article is well footnoted while this tells the story without them.
THE FEDERAL RESERVE’S March 23rd declaration that it intended to provide loans to non-financial corporations was decisive in indicating the Fed’s assumption of leadership of the government’s corporate bailout. It signaled what was expected of Congress and the Treasury. It also specified the intended level of support for big business in the coronavirus economic crisis.
On cue Senate Majority Leader Mitch McConnell and Senate Minority Leader Chuck Schumer announced that the centerpiece of their just-approved bill, soon to be called the Coronavirus Aid, Relief and Economic Security or CARES Act, was a giant rescue of non-financial corporations, amounting to half a trillion dollars.
That $500 billion was to be reserved entirely for companies with at least 10,000 employees and revenues of at least $2.5 billion per year. The Act set aside $46 billion to be shared between passenger airlines ($25 billion), cargo airlines ($4 billion) and “businesses necessary for national security,” a code name for Boeing ($17 billion).
This left $454 billion to distribute to the fortunate corporate recipients to be selected. Yet even this huge sum turned out to be just the tip of the iceberg. The actual payday for the country’s greatest non-financial companies would be of a different order of magnitude entirely.
The entire $454 billion remaining from Congress’s original allocation was thus credited to the Fed’s account as a cushion to cover potential losses.
This opened the way for the Fed to assume full charge of making advances to the corporations and, in particular, to leverage Congress’s original allocation by a factor of 10 — from $454 billion to roughly $4.54 trillion — “for loans, loan guarantees and other investments.”
Some $4.586 trillion, roughly 75% of the total $6.286 trillion derived directly and indirectly from CARES Act money, would go for the “care” of the country’s biggest and best-off companies. By contrast, as unemployment soared, just $603 billion was allocated for direct cash payments to individuals and families ($300 billion), extra unemployment insurance ($260 billion), and student loans ($43 billion).
The CARES Act spelled out an elaborate set of formal conditions concerning who qualified for Fed-Treasury largesse, and what they could and could not do with the advances they received. But the Act also left the door wide open for Treasury Secretary Steven Mnuchin, who was initially in charge of administering the law, to ignore those conditions, thanks to its ambiguity of language, inconsistencies, loopholes and qualifications.
In any case, the Fed’s assumption of authority over the bailout had the result of limiting Congressional debate over the question of the rules to be adopted and how they would be effectively applied. The Central Bank made it clear that it had little interest in imposing conditions on recipients, and the Democratic Party leadership went along.
As in the case of the 2008 bailout, the CARES Act established inspector generals and several boards to oversee the lending. But as before, these bodies were only authorized to report abuses, not to prevent or rectify them. It rendered any public scrutiny all the more difficult by granting the Fed the right to hold its meetings in secret and keep its minutes to itself.
The equivalent of two and a half times U.S. annual corporate profits, or about 20% of our annual GDP, was authorized to be dispensed without undue surveillance.
Bipartisan Corporate Handout
The rescue should not be particularly associated with the Trump Administration, though the President pushed hard for it. The top leaders of both political parties strongly identified with the handout, and overwhelming majorities of their followers in Congress went along more or less enthusiastically.
According to the Constitution, revenue measures are supposed to originate in the House of Representatives, where the Democratic Party presently has a majority. But the Democrats saw to it that consideration of the bill that became the CARES Act went to the Senate first, where the Republicans hold a majority.
There Schumer, in collaboration with Trump’s Treasury Secretary Mnuchin, took the lead in formulating the legislation, and as Schumer readily admitted, on the Republicans’ terms. The Senate approved the bill 96–0.
The Democrats’ so-called Progressive Caucus and the Congressional Black Caucus were both silent on the matter; and although Bernie Sanders and, in particular, Elizabeth Warren voiced objections, their protests were muted at best.
By the time the bill came out of the Senate, Democratic congressional leaders had already given it their de facto approval and the House could not easily overturn it, not that they had any intention of doing so.
The DP leadership was able to provide political cover for House Democrats in general, and the Party’s left wing in particular, by relieving members from having to vote on it through use of the House’s unanimous-consent “voice vote” procedure. Only a single Democrat, Alexandria Ocasio-Cortez — whose district at the time was the national epicenter of the pandemic — publicly objected to the bill, calling it one of the “largest corporate bailouts in American history.”
The strategy of the Democrats’ top leaders appears to have been to allow the Republicans to take chief credit for the bailout, while quietly ensuring its ratification, as it was also a top priority of their corporate backers — and supported by the great majority of the Party’s elected officials in Congress.
They apparently hoped that, with the victorious corporations’ spectacular gains grabbing the headlines, they could pry compensatory concessions from the Republicans for their other constituencies — on unemployment insurance, medical equipment and health care, and for supplementary or substitute salaries, as well as support for small businesses.
But the fatal flaw of this approach was that, by allowing the Republican Senate to shape the legislation, the Democrats gave up their major source of political leverage, which lay in their House majority. Once the CARES Act was approved, Schumer and Pelosi were obliged to admit, implicitly, how far they had fallen short by announcing, immediately upon its ratification, that they would call for a new expanded version.
To try to secure what they had failed to win via the CARES Act, Democrats had an obvious way forward: to pass their own bill through the House, and let the Republicans try to amend it in the Senate. It would have been simple enough for Democrats to push through legislation addressing the population’s desperate needs.
Yet astoundingly, the Democratic congressional leadership once again allowed the Republican Senate to take the initiative in writing the original bill and suffered still another ignominious defeat on the so-called COVID-19 Interim Emergency Funding Act, as virtually all its funding was, in one way or another, for business.
The new law was supposed to supplement the initial Act allocation for small businesses, and the bulk of its funding was officially for that purpose. In reality, though, most of the ostensibly small-business recipients were “small” only in a technical sense: firms worth more than a million dollars, medium-sized businesses and even corporations seized a piece of the action.
The only major item that the Democrats managed to leverage was for hospitals. But how these funds could be used was unrestricted, meaning that most would go to well-off administrators who would decide how it would be spent.
There was also a small new allocation of money for COVID-19 testing. On the other hand, Schumer and Pelosi failed to get any aid for state budgets, which were in crisis condition due to the collapse in state tax revenues their’ inability deficit spend.
There were, moreover, no additions for food stamps, despite a crisis of hunger that produced miles-long lines for food handouts; and no additions for rent, despite a tidal wave of evictions in the offing. Still the final House vote of approval was 388 for and five against, with Ocasio-Cortez again the only House Democrat who dared to vote no on the bill, terming it “insulting.”
Heroes and Health Crisis
Three weeks later, Pelosi finally made a show of seizing the initiative with her launch of the $3 billion Heroes Act, which offered the Party an opportunity to advance a full program that they could fight on. It did contain a strong set of liberal demands, but Pelosi largely undercut the bill’s political thrust by using it to signal to key donor constituencies that the Party had them at the forefront of its mind.
Most discrediting, Pelosi sought to address the desperate crisis of health care by calling for new funding for health insurance by way of the ludicrously expensive COBRA plan, which would support the insurance companies, and entirely neglect the millions who had lost their health- care coverage when they lost their jobs.
Pelosi’s bill made K-Street corporate-lobbying groups eligible for the Paycheck Protection Program, thereby offering funding to organizations whose very political purpose was to support big business and oppose political initiatives like the Heroes Act.
As these political skirmishes were playing themselves out, the Federal Reserve was proceeding unimpeded with its historic bailout of the corporations.
As Treasury Secretary Mnuchin explained, negotiators had “discussed on a bipartisan basis” the question of whether corporate recipients of bailout monies could use them for dividends, stock buybacks and salary increases for top managers, or were to maintain levels of employment and investment within their companies.
“What we agreed upon was the direct loans would carry the restrictions,” but “the capital markets transactions would not carry the restrictions.”
With respect to the CARES Act’s $46 billion allocation for airlines, air cargo companies and Boeing, what that meant in detail was that the Treasury Department would administer the bailout.
The rescue would take the form of direct loans and, to be eligible to receive support, recipients would have to accept certain fairly stringent, clearly defined restrictions. They could not issue dividends; were limited in the money they could allocate for stock buybacks; and they were required to retain 90% of their firm’s workers.
But with respect to the remainder of the corporate-bailout money, potentially amounting to ten times that sum, loans would take the form of Fed purchases of bonds issued by the corporations, and would not be made conditional on how they spent this money or their economic decisions more generally.
As Fed Chair Powell explained, in understated terms, “Many companies that would’ve had to come to the Fed have now been able to finance themselves privately . . . and that’s a good thing.” The Fed’s initiatives by themselves galvanized the markets, as interest rates fell simply on the news that it intended to intervene.
More Funds for Finance
From the start of the crisis, as the scale of the COVID-19 pandemic began to register, the Fed had been intervening on an ever-larger scale in the funding markets, attempting to get more money on more ;favorable terms to financial-sector lenders, with the goal of making it profitable for them to make loans to non-financial corporations.
It had reduced the target range for benchmark Federal funds to 0–0.25% and, in its “forward guidance,” committed to keeping it there for the foresee-able future; lightened regulations on the banks to make it easier for them to lend, lowering their capital and liquidity requirements; made massive purchases of Treasury bonds to help bank reserves; and ultimately declared unlimited Quantitative Easing.
But these steps had had little effect at a time when the banks and the non-bank lenders, who could potentially have benefited from the Fed’s largesse, had no interest in providing credit to already debt-laden non-financial borrowers. It was obvious that doing so would have been far too risky. If the Fed wanted lending to non-financial corporations to increase, it would have to defy the markets and make this happen.
When the Fed signaled its intention to backstop the corporate-bond market by establishing its series of loan facilities, it suddenly and qualitatively reduced the risk of private lenders in buying corporate bonds, giving them the confidence to re-enter the market. This of course is what they did en masse, opening the way to a giant wave of borrowing by the non-financial corporations.
The lenders’ renewed buying actually represented a continuation of their earlier wave of investment in corporate debt, which had made for record corporate borrowing and a bubble in the corporate-bond market that news of the global spread of the coronavirus in February 2020 threatened to burst.
So when the Fed intervened to revive non-financial corporate borrowing, stating that it would purchase bonds in whatever amount was required to sustain their value, it was in effect re-starting and extending the corporate-bond-market bubble.
While it is the success of so many famous non-financial corporations in securing loans at artificially reduced prices that has made the headlines, it is actually the lenders, the financiers, who have benefited most decisively — in two ways.
First, had the bond markets remained frozen, many non-financial corporations would soon have had no choice but to declare bankruptcy, caught in a vice between the inability to pay their current debts due to the loss of revenue caused by the pandemic; and the inability to refinance their debt except at impossibly high interest rates.
Lenders to these non-financial corporations, including commercial banks, hedge funds, mutual funds, investment banks, pension funds and other investment firms that constitute the realm of shadow banking, would then have faced significant losses in the bankruptcy process.
Instead, by avoiding a spate of bankruptcies, the Fed’s revival of the bond market bailed out lenders and protected their assets.
Second, as the economy started shutting down, investors came to view the record-high levels of non-financial corporate debt, incurred in the period before the coronavirus crisis, as much riskier than before. They began demanding higher interest rates for new debt and started selling off old debt.
With non-financial corporations strapped, little new debt could be issued, and the value of the old debt collapsed, leaving debt holders in a losing position. Again, when the Fed jump-started the bond market by pledging to protect the value of non-financial corporate debt, the value of the bonds rebounded, and investors avoided huge losses.
The Fed had effectively induced private lenders back into the bond market by serving as lender of last resort — or better, as lender of first resort, socializing their potential losses while ensuring they could privatize their potential gains.
In doing so, the Fed was enabling the non-financial corporations to assume greater debt than would otherwise have been possible. But this was in no way to resolve the difficulties that had impelled those companies to take on that debt in the first place — it was rather to kick their problems down the road, where they could become even harder to deal with.
The Fed has avoided a meltdown for the moment, but will likely face an even greater crisis in future.
Billionaire Coronavirus Bonanza
From this juncture onwards, bond spreads reversed themselves, and began to decline. The spread for BBB-rated firms, which had peaked at 4.88% on March 23, 2020, had fallen to 2.83% by May 1st. In the same interval, the high-yield (junk bond) spread fell from 10.87% to 7.7%.
Bloomberg’s high-grade borrowing cost index, which had skyrocketed to 4.5%, had by the beginning of June 2020 fallen to 2.4%, near the pre-pandemic lows reached in early March 2020.
Investment-grade bond issues went through the roof, with issuance breaking the previous monthly record twice over. The March 2020 volume of $262 billion broke the previous record of $168 billion in May 2016, and then the April 2020 volume of $285 billion broke March’s record.
The impact of the Fed’s declaration of its intentions was powerful, as evidenced in a joint research study undertaken by American Prospect and The Intercept soon after. They located published reports of bond sales by 49 corporations amounting in value to at least $190 billion.
Many that took advantage of the reduction in the cost of borrowing gifted by the Fed were among the cream of industrial America — Oracle, Disney, Exxon, Apple, Coca-Cola, McDonald’s, and so on down. They may not have been desperate for the handout, but they could not resist profiting from it.
Indicative of the conjuncture, Amazon locked in some of the lowest borrowing costs ever secured in the U.S. corporate-bond market, raised $10 billion on a three-year bond at the rate of 0.4%.
This was less than two-tenths of a percentage point above the rate investors charged the U.S. government when it recently issued debt of a similar maturity. It also set new lows on Amazon’s already existing corporate bonds coming due in seven, ten and forty years.
Before the Fed’s 23 March declaration, it was unclear whether certain major corporations with weak balance sheets and/or cloudy prospects — among them: Boeing, Southwest, Hyatt Hotels — would be able to get loans on the bond market.
But as soon as the Fed had announced its intentions, many of them immediately gained access to financing. Recent “fallen angels” like Ford and Kraft Heinz, both of which had had bonds trading at distressed levels only weeks before, swiftly completed successful offerings.
Boeing’s 30 April offering raised $25 billion and was vastly oversubscribed. Its success enabled Boeing to avoid having to accept the loan offered by the corporate bailout, which, as noted, would have come with fairly stringent conditions on retaining employees, as well as limitations on share buybacks and issuing dividends.
Boeing did not fail to exploit its new advantage, immediately announcing that it would cut 16,000 jobs. GE Aviation, another company eligible for a loan under the CARES Act, took the same route, floating a $6 billion loan on the open market and firing 13,000 employees shortly thereafter.
Finally, the stock market, reassured by the instantly successful refinancing of so much of the non-financial corporate sector and the Fed’s implicit promise to keep interest rates down — and unconcerned, as it long has been, about underlying profits, let alone productivity — followed the same path as the corporate-bond market.
The S&P 500 hit rock bottom on March 23rd at 2,237, having fallen from its February 19, 2020 peak of 3,386, but then rocketed to 3,139 on June 4th — a rise of 40% in the interval while the actual economy cratered, and the best 50-day gain for the index since comparable records began in 1952.
Market capitalization hit its low of $21.8 trillion, or 103% of GDP, on March 23rd. But by April 30th it was back up to $28.9 trillion, or 136.3% of GDP. There had been no other obviously relevant good news in the interim, but the S&P 500 price-earnings ratio, which had fallen back as the economy slumped, once again rose as stock prices took off in the face of plunging profits.
Merely by virtue of its promises, the Fed was responsible for putting $7.1 trillion of wealth in the hands of equity investors, at a time when the real economy would otherwise have brought about the opposite result.
In roughly the same period, between March 18 and June 4, the wealth of U.S. billionaires increased by $565 billion, reaching the level of $3.5 trillion, up 19%. Unsurprisingly, Jeff Bezos helped lead the way, his wealth increasing by $34.6 billion, a stunning 31%, while Mark Zuckerberg gained an extra $25 billion.
Profits by Predation
The outcome of the Fed’s efforts has been game-changing. It has remade the corporate-bond market and transformed the economic position of leading non-financial corporations, at least for now.
What the bipartisan establishment was doing was providing the conditions, to the extent that they could, to enable corporate leaders and shareowners to pursue their own interests in the ways they thought best, no questions asked.
At the front of their minds, in this respect, was that underwriting economic egoism no longer necessarily meant enhancing corporate decision-makers’ ability to increase investment or employment at a profit, or to maximize profits with the minimum of capital accumulation by way of squeezing their workers — or even simply to reproduce and sustain their own firms.
They have grasped the extent to which money making has been de-linked from profitable production, especially in a weak economy, and it was for that reason that they were so explicit and insistent on protecting the ability of non-financial corporate managers and owners to pursue their own self-interests — by buying back stocks, paying out dividends, increasing executive pay, or even liquidating part or all of the holding.
They have recognized, in particular, the pervasiveness of corporate owners preying on their own firms with a minimum of risk, as so dramatically exemplified by private equity, and the need to ensure money making in this mode through making borrowing cheaper and safer, sometimes as an unavoidably indirect means to encourage actual investment and employment.
With the U.S. economy performing so very badly, as it has been doing for such an extended period, the bipartisan political establishment and its leading policymakers have come to the stark conclusion, consciously or unconsciously, that the only way that they can assure the reproduction of the non-financial and financial corporations, their top managers and shareholders — and indeed top leaders of the major parties, closely connected with them — is to intervene politically in the asset markets and throughout the whole economy, so as to underwrite the upward redistribution of wealth to them by directly political means.
This in short is predation as a precondition for production. It is, indeed, what Congress and the Fed have accomplished with their large-scale corporate bailout in the face of plunging production, employment and profits.
*I am grateful to Aaron Brenner for his sharp critical reading and indispensable guidance on the financial issues at stake, as well as to Ryan Lee for his outstanding research assistance.