Kindle Notes & Highlights
I was concerned that too many Keynesians had become irresponsible about deficit spending as a short-term measure for reviving the economy, and I doubted that some fiscal responses to unfavorable economic conditions could achieve their aims in the real world.
“On the financial side, one of the most glaring gaps of both schools has been the failure to recognize the emergence of a heavy debt structure and its impediment to economic recovery.”
Forecasters also tend to rely too heavily on historical data.
In so many ways, it all comes back to independence—the independence to research, to analyze, and to speak.
such projections encourage speculation.
The volume of outstanding corporate bonds classified as investment grade has
sharply to the low end of this category, while the volume of below-investment-grade bonds has increased sharply.
The creditworthiness of business corporations may well be stretched, with further borrowing pushing more and more corporations below investment grade.
be the federal government that fills the GDP financing gap even more than it has in recent years, with the high probability that its credit rating will be lowered a notch or two.
But over time, firms and investors came to define liquidity in terms of
corporation’s capacity to borrow. In order to borrow, firms typically issued short-term paper, borrowed short-term from banks, and had back-up lines of credit. A lot of that activity was meant to carry firms through seasonal or cyclical periods of relative capital scarcity. They expected to pay off short-term obligations in a matter of weeks or at most months. But more and more often corporations rolled over these instruments, so that in a fundamental or operational sense they became sources of long-term liquidity. Thus, in today’s markets, short-term liabilities are actually long-term
...more
seems clear to me that the combination of deteriorating credit quality, elusive marketability, and high financial concentration has increased the role of the central bank as the lender of last resort,
market participants may be aware of this reality, and therefore have concluded that downdrafts in financial asset values by, say, 20 or 25 percent will be met by powerful monetary easing.
monetary policy has become a greater captive of financial markets than ever before.
“today’s Fed also seems to want to be a lender of early resort in order to nip recessions in the bud. However, promoting a public perception that the Fed will always be able to prevent serious recessions and drops in asset prices is a reliable precursor to overspeculations and credit crunches.”
The harsh reality is that weaker borrowers typically are weeded out by sustained economic slumps or crushed by competitors (that is, in the words of Austrian economist Joseph Schumpeter, by “the gales of creative destruction”). In other words, low-quality debt tends to get flushed out not through premeditated, gradualist, managerial decision making, but by capitalism’s roughest edges—widespread business failures and bankruptcy.
coronavirus has motivated the US federal government to dramatically increase its outlays in an effort to offset some of the precipitous shortfall in private-sector spending. This is a laudable policy. But turning down the federal spending spigot will involve difficult political decisions.
