By ROBERT BRENNER*

How America's bipartisan political establishment intervened in financial markets and across the economy to promote bottom-up wealth redistribution during the Covid-19 crisis

The declaration of the Federal Reserve [Fed – US Central Bank] of March 23, 2020 that intended to grant loans to large non-financial companies was decisive in signaling that he had taken the lead in the government's rescue of companies. It showed what was expected of Congress and the Treasury and also specified the intended level of support during the coronavirus economic crisis.

At the appropriate time, Senate Majority Leader Mitch McConnell and Senate Minority Leader Chuck Schumer announced that the core element of their newly passed bill – soon to be called the Coronavirus Aid, Relief and Economic Security Act [Coronavirus Aid, Relief and Economic Security Law] or CARES Act – was a huge bailout of large non-financial corporations worth half a trillion dollars.

That $500 billion would be reserved in full for companies with at least 10.000 employees and revenue of at least $2,5 billion a year. A further US$ 46 billion was foreseen to be divided between passenger airlines (US$ 25 billion), cargo airlines (US$ 4 billion) and “companies necessary for national security”, a code name for Boeing (US $17 billion). That left $454 billion to be distributed to the lucky corporate beneficiaries to be selected. However, even this large sum turned out to be just the tip of the iceberg. The actual “payday” for the country's largest non-financial corporations would be of an entirely different order of magnitude.

The remaining $454 billion of the original Congressional appropriation was thus credited to the Fed's account as a cushion to cover potential losses. This paved the way for the Fed to assume full responsibility for making advances to businesses and, in particular, for multiplying by 10 the original Congressional allocation – from $454 billion to about $4,54 trillion – “for loans, loan guarantees and other investments”.

About US$4,586 trillion, approximately 75% of the total US$6,286 trillion derived directly and indirectly from CARES Act, would go towhich” [care] of the largest and richest companies in the country. For comparison, even as unemployment rose, only $603 billion went to direct cash payments to individuals and families ($300 billion), extra unemployment insurance ($260 billion) and student loans ($43 billion). $XNUMX billion).

A CARES Act defined an elaborate set of formal conditions regarding who qualified for the bounty of the Fed-Treasury, and what could or could not be done with the advances received. But the law also left the door open for Treasury Secretary Steven Mnuchin, who was initially responsible for administering the law, to ignore those conditions, thanks to its ambiguity in language, inconsistencies, loopholes and restrictions.

In any case, the fact that the Fed took responsibility for the rescue operation resulted in limiting the debate in Congress on 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 agreed.

As on the occasion of the 2008 bailout, the CARES Act created supervisory positions and several loan supervisory boards. However, as before, these bodies were only authorized to report abuses, not to prevent or correct them. It made any public scrutiny even more difficult by granting the Fed the right to hold its meetings in secret and not release the minutes.

The equivalent of 2,5 times US annual corporate profits, about 20% of the country's annual GDP, was allowed to be spent without proper oversight.

Business aid is bipartisan

The rescue operation should not be particularly associated with the Trump administration, although the president has pushed hard for its approval. The main leaders of both political parties strongly associated with this aid, and the overwhelming majority of their congressional supporters more or less enthusiastically agreed.

Under the Constitution, decisions involving the budget must come from the House, where the Democratic Party currently has a majority. However, the Democrats made sure that the analysis of the bill that became the CARES Act pass first through the Senate, where Republicans hold a majority. In this, Schumer, in collaboration with Trump's Treasury Secretary Mnuchin, took the lead in formulating the law - on Republican terms, as Schumer readily admitted. The bill's approval score in the Senate was 96 to 0.

So much so called Democrats' Progressive Caucus [Progressive Bench of Democrats] as the Congressional Black Caucus [Blacks in Congress] were silent on the matter; and although Bernie Sanders and, in particular, Elizabeth Warren objected, their protests were muted at best.

By the time the bill left the Senate, Democratic leaders in Congress had actually passed it and the House couldn't easily overturn it — not that they had any intention of doing so. Democratic Party leadership provided political cover for House Democrats in general, and the left wing of the party in particular. She saved them from having to vote directly for him by using the token voting procedure. Only one Democrat, Alexandria Ocasio-Cortez — whose district was the national epicenter of the pandemic at the time — has publicly opposed the bill, calling it one of the “greatest corporate bailouts in American history.”

The strategy of the main Democratic leaders seems to have been to allow the Republicans to take credit for the rescue, while at the same time silently guaranteeing its ratification, since it was also a top priority of their business supporters – in addition to having the support of the large majority of the party's elected members in Congress.

Apparently, they hoped that, with spectacular corporate earnings in the headlines, it would be possible to get the Republicans to compensate for their other constituents: unemployment insurance, medical equipment, and health care; and supplementary or substitute salaries, as well as support for small businesses. However, the crucial flaw with this approach was that, by allowing the Republican Senate to craft legislation, the Democrats gave up their main source of political influence: their majority in the House. Once approved the CARES Act, Schumer and Pelosi were forced to implicitly admit their failure when they announced, immediately after ratification, that they would request a new, expanded version.

To try to secure what they failed to obtain through CARES Act, the Democrats had an obvious way forward: pass their own bill in the House and let the Republicans try to change it in the Senate. It would have been simple enough for the Democrats to pass legislation that addressed the people's urgent needs. Surprisingly, however, the Democratic leadership in Congress once again allowed the Republican Senate to take the lead in drafting the original bill, and suffered another disgraceful defeat with the so-called COVID-19 Interim Emergency Funding Act [COVID-19 Interim Emergency Financing Act], as virtually all of its funding has gone, in one way or another, to businesses.

The new law was supposed to supplement the initial allocation for small businesses, and most of its resources were officially for that purpose. However, most recipients were “small” only in the technical sense: companies worth more than a million dollars, medium-sized, and even large companies were covered.

The only major item the Democrats were able to score was for hospitals. However, there were no restrictions on how these funds could be used, meaning the majority would go to wealthy administrators who would decide how those funds would be spent. There was also a small allocation of money for COVID-19 testing. On the other hand, Schumer and Pelosi did not get any help for the states, which were in crisis due to the collapse of their tax revenues and the impossibility of carrying out expenditures that would imply a deficit.

In addition, there were no additions to food stamps, despite a hunger crisis that generated long lines for food donations; nor for rent, despite a tidal wave of imminent evictions. Still, the final House vote was 388 in favor and five against, with Ocasio-Cortez again the only House Democrat who dared to vote "no", calling the bill "outrageous".

Heroes and the health crisis

Three weeks later, Pelosi finally put on the show by taking the initiative with the release of Heroes Act [Heroes Act], $3 billion, which offered the Democratic Party the opportunity to present a complete program that they could continue to fight with. The bill contained a robust set of liberal demands, but Pelosi profoundly undermined its political clout by using it to signal to the party's major donors that it put them first.

To reinforce the discredit, Pelosi still sought to face the pressing crisis of the health system by asking for new funding for health insurance through the COBRAplan, an absurdly expensive measure that would support insurers but utterly neglect the millions who lost their health coverage along with their jobs.

Pelosi's bill made K-Street business lobby groups eligible for Paycheck protection program [Wage Protection Program], offering funding to organizations whose real political purpose was to support big business and oppose political initiatives like the Heroes Act.

As these political skirmishes unfolded, the Federal Reserve proceeded unhindered with its historic rescue of large companies. As Treasury Secretary Mnuchin explained, the negotiators "had discussed in bipartisan terms" the issue of whether companies receiving the bailout money could use it to pay dividends, buy back their shares and raise salaries for top executives, or whether employment and investment levels should be maintained. “We agreed that direct loans would have restrictions”, but “capital market transactions would not have restrictions”.

Regarding the US$ 46 billion of  CARES Act for airlines, air cargo companies and Boeing, this meant, in short, that the Treasury Department would administer the bailout. This would take the form of direct loans and, in order to be eligible, beneficiaries would have to accept certain very strict and clearly defined restrictions. They couldn't pay dividends; the amounts allowed for repurchasing shares would be limited; and would be obliged to keep 90% of the workers.

As for the rest of the corporate bailout money, potentially worth ten times that sum, the loans would be through the Fed, through the purchase of bonds issued by big companies, and would not be conditional on how they would spend that money or their economic decisions in general. As Powell, the chairman of the Fed, explained sweetly, "many companies that would have had to go to the Fed are now able to fund themselves privately... and that's a good thing." The Fed's move alone galvanized markets, as interest rates fell on the mere news of the intention to intervene.

More funds for finance

Since the beginning of the crisis, as the COVID-19 pandemic evolved, the Fed has been intervening on an ever-increasing scale in the credit markets, trying to obtain more money on more favorable terms for financial sector lenders, with the objective of making lending to non-financial corporations profitable. He reduced the range of the reference federal funds target to 0 to 0,25%, and, as a “guideline”, committed to keeping it at that level for the foreseeable future; loosened regulations on banks, reducing capital and liquidity requirements, in order to facilitate lending; made massive purchases of Treasury bonds to help bank reserves; and finally declared Quantitative Easing [Quantitative Easing (Monetary)] unlimited.

However, these measures had little effect at a time when banks and non-bank lenders, who could benefit from Fed largesse, had no interest in providing credit to already indebted non-financial borrowers. It was clear that this would be too risky. If the Fed wanted lending to nonfinancial corporations to increase, it would have to defy the markets and intervene.

When the Fed signaled its intention to support the corporate bond market [corporate-bond market], establishing his series of lending facilities, he suddenly qualitatively reduced the risk of private lenders buying these bonds, giving them confidence to return to the market. That's what they did en masse, of course, paving the way for a giant wave of borrowing by large non-financial corporations.

The new wave of creditor buying actually represented a continuation of the previous one, which spawned record lending 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 stepped in to revive lending to large non-financial corporations, declaring that it would buy bonds in whatever amount was necessary to sustain their value, it was actually restarting and widening the corporate bond market bubble. Although what made the headlines was the success of several famous non-financial corporations in securing loans at artificially reduced prices, in reality it is the lenders, the financiers, who have benefited decisively – in two ways.

First, if the bond markets had remained frozen, many non-financial corporations would soon have had no choice but to declare bankruptcy, as they were stuck between being unable to pay their current debts due to the loss of revenue caused by the pandemic; and the inability to refinance its debts, except at extremely high interest rates. The creditors of these non-financial corporations, including commercial banks, hedge funds, investment funds, investment banks, pension funds and other investment institutions that make up the universe of shadow banking system [shadow banking system], would have faced significant losses in the bankruptcy process. Instead, by staving off a wave of bankruptcies, the Fed's bond market revival saved creditors and protected their assets.

Second, as the economy began to shut down, investors came to view the record levels of non-financial corporate debt contracted in the run-up to the coronavirus crisis as much riskier than before. They started demanding higher interest rates on new debt and selling off old debt. With large non-financial corporations stranded, little new debt could be issued and the value of old debt collapsed, leaving creditors in a bind. Again, when the Fed gave the initial stimulus to the bond market by promising to protect the value of non-financial corporate debt, bond values ​​recovered and investors avoided huge losses.

The Fed had successfully induced private creditors to return to the bond market, serving as lender of last resort – or rather, lender of first resort, socializing their potential losses and ensuring that they could privatize their potential gains. It thus allowed non-financial corporations to take on larger debts than would otherwise be possible. However, the objective was by no means to solve the initial difficulties that impelled these companies to take on those debts – but to push their problems with their belly, to where they could become even more difficult to be solved.

The Fed avoided a collapse at the time, but will likely face an even bigger crisis in the future.

Coronavirus billionaire bonanza

From this critical point, the spreads of titles reversed and began to decline. O spread for companies rated BBB, which had peaked at 4,88% on March 23, 2020, dropped to 2,83% on May 1. In the same range, the spread high return (junk bonds [toxic/junk bonds]) fell from 10,87% to 7,7%.

O high-grade borrowing cost index Bloomberg's [high grade cost of borrowing index], which had soared to 4,5%, fell to 2,4% in early June 2020, close to pre-pandemic lows reached in early March 2020. 2020. Issuance of investment-grade bonds soared, twice breaking the previous monthly record. March 262 volume of $168 billion broke previous record of $2016 billion (May 2020) and then April 285 volume of $XNUMX billion broke March record .

The impact of the Fed's statement was powerful, as was evident in a study conducted shortly thereafter by American Prospect in partnership with The Intercept. They located bond sales reports published by 49 major companies worth at least $190 billion.

Many of those who took advantage of the Fed's reduced cost of borrowing were part of the cream of “industrial America” – Oracle, Disney, Exxon, Apple, Coca-Cola, McDonald's and so on. They might not have been desperate for this aid, but they could not resist profiting from it. Very illustrative of this scenario, Amazon achieved some of the lowest borrowing costs ever secured in the US corporate bond market: it raised $10 billion in three-year bonds at the rate of 0,4%. That was less than 0,2 percentage points above the rate investors charged the US government when it recently issued debt with a similar maturity. New lows were also set for Amazon's existing seven-, ten- and forty-year debt.

Prior to the Fed's March 23 statement, it was unclear whether some of the biggest companies with weak balance sheets and/or clouded prospects — Boeing, Southwest, Hyatt Hotels among them — would be able to borrow on the bond market. But once the Fed announced its intentions, many of them immediately gained access to funding. Recent “fallen angels” like Ford and Kraft Heinz, both with bonds trading at depressed levels just a few weeks earlier, have quickly completed successful offerings.

Boeing's offer on April 30 raised $25 billion and was well below demand. Its success allowed the company not to be obliged to accept the loan offered by the rescue of companies, which, as mentioned, would be accompanied by very strict conditions for the maintenance of employees, as well as limitations on the repurchase of shares and payment of dividends. Boeing did not fail to exploit its new advantage, immediately announcing that it would cut 16.000 jobs. GE Aviation, another company eligible for a loan under the CARES Act, followed the same path, launching a loan of US$ 6 billion in the open market [open market] and laying off 13.000 employees shortly thereafter.

Finally, the stock market followed the same path as the corporate bond market, reassured by the instant success of the refinancing of much of the nonfinancial sector and by the Fed's implicit promise to keep interest rates low - without worrying, as it's been a long time, with low profits, not to mention productivity. The S&P 500 (one of the main indicators of the New York Stock Exchange and NASDAQ) bottomed out on March 23, with 2.237 points, after its peak of 3.386 on February 19, 2020. However, it then skyrocketed to 3.139 on June 4 – up 40% as the real economy plummeted, and representing the index's biggest gain for a 50-day period since comparable records began in 1952.

Market capitalization bottomed out at $21,8 trillion, or 103% of GDP, on March 23. However, as of April 30, it was back at $28,9 trillion, or 136,3% of GDP. There was no other clearly relevant good news in the interim, but the S&P 500's price/return ratio, which had fallen as the economy slumped, rose again as stock prices soared, despite falling earnings.

By virtue of its promises alone, the Fed was able to put $7,1 trillion in the hands of equity investors, at a time when the real economy would have produced the opposite result. In almost the same period, between March 18 and June 4, the wealth of US billionaires increased by US$565 billion, reaching US$3,5 trillion, an increase of 19%. Not surprisingly, Jeff Bezos led the way, adding $34,6 billion to his wealth (a staggering 31%) while Mark Zuckerberg earned $25 billion.

Profits from Predation

The result of the Fed's efforts was a game changer. The corporate bond market has been reconfigured and the economic position of major non-financial corporations has been transformed, at least for the time being.

What the establishment The bipartisan aim was to provide the conditions, as much as possible, to allow corporate executives and shareholders to pursue their own interests as they saw fit, no questions asked.

At the forefront of his reflections in this regard was that promoting economic selfishness no longer necessarily meant reinforcing the ability of business leaders to increase investment or profitable employment, or to maximize profits with a minimum of capital accumulation through pressure on workers – or even simply reproducing and sustaining their own companies.

They understood how decoupled making money was from making a profit, especially in a weak economy. It was for this reason that they were so vocal and insistent in protecting the ability of owners and managers of large non-financial companies to pursue their own interests – by buying back their shares, paying dividends, raising executive compensation or even liquidating part or all of them. full share.

They accepted, in particular, the spread of large business owners benefiting at the expense of their own companies with a minimum of risk, as dramatically exemplified by private equity; and the need to secure the means of making money in this way, making borrowing cheaper and more secure, sometimes as an unavoidable indirect means of stimulating real investment and employment.

With the US economy performing so poorly for so long, the establishment A bipartisan politician and his top policy makers have come to the conclusion, consciously or unconsciously, that the only way to ensure the reproduction of large financial and non-financial corporations, their top managers and shareholders – and, indeed, the top leaders of the biggest parties, closely linked to them – is to intervene politically in financial markets and throughout the economy, in order to promote the redistribution of wealth to them (thus from the bottom up) by directly political means.

In short, this means predation as a precondition for production. That's what Congress and the Fed have actually accomplished with their large-scale rescue of corporations in the face of slumping production, employment, and profits.

*Robert Brenner is director of the Center for Social Theory and Comparative History at the University of California, Los Angeles (UCLA). Author, among other books, of The boom and the bubble (Record).

Translation: Ilan Lapyda

Originally published in the magazine against the current.

This article is adapted from Robert Brenner's article in New Left Review May/June, which is Part I of two parts on the economy. To see you: https://newleftreview.org/issues/II123/articles/robert-brenner-escalating-plunder .