Capitalist economies run on faith in the future (also, labor exploitation).
The extension of credit — which is to say, a lender’s bet on the future profitability of as yet unborn enterprises and endeavors — is the fuel of growth. For this reason, recessions are typically triggered by a sudden loss of confidence in the economy’s future prospects, which leads lenders to cut back on loans (and/or to ask borrowers to pay high interest rates), which forces vulnerable firms to slash labor costs by firing workers, which reduces overall demand for goods and services, which further erodes confidence in the economy’s future prospects in a vicious cycle.
The COVID-19 recession, however, is atypical. This downturn was not initially driven by a collapse in credit so much as a direct blow to consumer demand: The pandemic rendered entire economic sectors inoperable, thereby choking off income to their workers.
Of course, that public-health shock gutted faith in the future in short order. And a credit crunch duly emerged in March as investors in corporate bonds fled to cash. But the Federal Reserve nipped a new financial crisis in the bud by providing the corporate bond market with rapid, vast, atypical support: To backstop the financing needs of big business, the central bank announced that — for the first time in its history — it would purchase bonds directly from corporate firms, while also buying such bonds secondhand from private banks. Congress then provided the Fed with a $454 billion pot of money to backstop its loans.
These interventions were more than effective. By reassuring private investors that there would always be a buyer for their corporate bonds, the Federal Reserve didn’t just maintain corporate America’s access to credit — it allowed it to enjoy historically cheap borrowing costs in the middle of the worst economic crisis since the Great Depression.
Earlier this month, Google’s parent company Alphabet secured the most generous terms on a seven-year corporate bond sale in any company’s recorded history. Even relatively risky large firms — such as the aluminum-packaging company Ball Corporation — are reaping the fruits of the Fed’s largesse: On Monday, Ball sold $1.3 billion worth of ten-year bonds at an interest rate of 2.875 percent, the lowest ever for a U.S. speculative-grade offering on that timescale, according to Bloomberg.
This state of affairs represents a remarkable achievement for the Federal Reserve. Although the central bank’s heavy-handed interventions may perturb those who harbor a childish belief in the “invisible hand” — and irk those who justifiably resent corporate America’s exemption from the nation’s collective suffering — those interventions were surely preferable to inaction. By overriding the grim dictates of market forces, a public institution saved the world from brutal financial crisis and potential depression. All else equal, it is a good thing that the Fed saved Wall Street.
Unfortunately, though, all else is not equal — because Congress failed to do Main Street the same favor.
The CARES Act provided America’s small-business sector with significant support. But Congress failed to make that support an open-ended entitlement for all U.S. businesses and attached strings to the program that rendered it useless for the most vulnerable small firms.
Recessions have an innate tendency to foster corporate consolidation and inequality. When business conditions are bad, investors will seek safety, choking off credit to small, unproven firms and providing it to large, cash-rich ones. Meanwhile, corporate titans have the reserves to weather a long storm; small enterprises typically don’t. And when the latter fail en masse, the big boys can scoop up their capital and real estate at a steep discount, and then cash in when the recovery arrives.
This dynamic is a perennial feature of downturns. But the nature of the COVID crisis, which has hammered providers of in-person services such as restaurants (a sector in which small firms predominate) while doing relatively little damage to the digital economy (a sector in which large firms predominate), makes the forces of recessionary consolidation all the stronger. And by providing superlative support to corporate borrowers — and meager aid to the small business sector — the U.S. government has turbocharged those forces.
As Bloomberg notes, while large corporations feast on cheap credit, small businesses are starving: In a recent Fed survey of senior bank loan officers, 70 percent said they were tightening lending standards on loans to small companies — the highest that figure has been since late 2008.
Which is to say: Small businesses are operating in a world where the conventional rules of steep recessions apply; large corporations — including relatively high-risk ones — are not.
Congress could rectify this inequity with sufficiently bold fiscal policy. But the Republican Party’s refusal to support more than $1 trillion in further relief makes such policy impossible. And the GOP’s intransigence on fiscal aid to states has stalled congressional negotiations over a more limited relief package. As of this writing, it looks like no further fiscal support will be enacted until at least September. And what’s the rush, really? Sure, millions of renters are at risk of losing their homes in the interim, while thousands of small-business owners are struggling to sustain their livelihoods. But both parties’ lawmakers have conventions to (virtually) attend in the coming weeks — and, thanks to the Fed’s robust efforts, their portfolios are doing just fine.
