Unlimited and Unchecked Stimulus: Are We Killing Capitalism?
On 27 March 2020, the US government enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act, embarking on an unprecedented program of monetary and fiscal stimulus in response to the COVID-19-induced economic shutdown. The level of stimulus has been broad; the program parameters were put together at warp speed; and, even as negotiations over the fourth round of stimulus continue, it is generally expected that further steps and programs may be required as the extent and duration of the pandemic impacts become more predictable. As Federal Reserve Board (FRB) Chair Jay Powell has stated, the US government’s stimulus commitment needs to follow a “whatever-it-takes” policy approach to prevent economic illiquidity from becoming insolvency.
Predictably, the amounts, parameters, and rapid rollout of this unparalleled and open-ended stimulus have raised concerns. The functioning of oversight committees and transparency around the various programs that ultimately will distribute record amounts of taxpayer-funded stimulus need scrutiny. Similarly, long-term concerns surround the resulting budget deficits and the impact on capital markets.
As Congress and the administration consider yet another round of unfunded stimulus, CFA Institute surveyed its diverse US membership of professionally trained financial analysts to get their views and feedback on these matters. As practitioners who are engaged with company financial reporting and close observers of market and economic fundamentals, we sought their on-the-ground assessment of key stimulus and market integrity issues. These include views on the size of the stimulus-induced deficits, the level of disclosure around stimulus program distributions, the adequacy of current oversight efforts, and the impacts of record stimulus on capital market functions.
This survey initiative sparked a strong and quite decisive response from members on these issues. In fact, the survey response rate was the highest (11%) for any policy issue ever surveyed by CFA Institute — including issues related to the Great Financial Crisis (GFC) and the Dodd-Frank Act. Clearly, the market volatility and the historic economic response to the COVID-19 crisis has gained the attention of all stakeholders, not the least of whom are professional investors and advisers.
What is increasingly clear is the frustration investment professionals feel regarding securities markets and financial analyses that have become unnervingly detached from economics. Complaints abound regarding massive stimulus well beyond the GFC levels. So, too, do concerns about the seemingly unchecked FRB authority to buy almost any asset class — from distressed debt to toxic securitizations and even the debt of the walking dead, including companies that haven’t had enough profits to pay even the interest on their outstanding debt for three years running — keeping both the borrowers and the markets in these instruments floating along. These efforts in the name of financial emergency, liquidity preservation, and insolvency avoidance are wearing thin with finance professionals, as reflected in the survey results. Importantly, the vast majority of respondents, more than 90% in some cases, are deeply concerned about bailout program transparency, including details about the recipient, deal terms, and any connections to Washington insiders. More than 75% of the respondents feel the level of oversight and reporting is insufficient.
In just the first few weeks following the stock market crash in March, the government had done whatever it felt necessary to stave off recession, prop up debt markets, and give free money to businesses affected by the COVID-19 shut down. In that time, the stock market has rallied back to new, all-time highs despite a severe drop in economic activity of unknown duration. All we know is that the government will backstop whatever occurs.
Before free-market capitalism as we know it is completely demolished, we must ask honest questions about what comes next and for how long, and how to ensure honest oversight. As Congress considers its next stimulus move, respondents to our survey, the people who are professionally trained market analysts, rightly assert this must not be allowed to continue in unlimited fashion or in the shadows. Busting the budget now for immediate preservation of current economic interests must be done carefully and with unquestioned integrity. If Wall Street and the investor class are the only beneficiaries, while the rest of society is left to grind and future generations are left to pay the tab, our system will have failed miserably. Government must show courage and planning now to ensure that the stimulus lands where it is needed, that accountability is guaranteed, and that our experiment with whatever-it-takes intervention into free markets ends.
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