Thoughts in Charts: No Fighting It
One of the most common phrases in the COVID Crisis financial era seems to be “don’t fight the Fed”. While there is a lot of uncertainty in the economy, the influx in available money from the Federal Reserve and U.S. Treasury has been extensive. If we are going to trust this money as supporting our markets, it’s probably important that we understand the tools being used.
This week’s thoughts in charts illustrates the ways in which money has been flowing into the system, but also provides an opportunity to see the structure and the timing.
There are two types of programs:
- Loan Facilities that lend directly
- Purchase Facilities that buy debt from those that lent directly
The Loan Facilities are a bit easier to get your head around, partially because they are familiar from the 2008 crisis and because most of us are familiar with receiving a direct loan. The Paycheck Protection Program (PPP) was by far the largest of the direct lending activity with about $525 billion issued to small businesses.1 The chart illustrates that these Loan Facilities’ programs got off the ground quickly and pumped a substantial amount of money into the economy.
The Purchase Facilities are a little more interesting because they are a newer concept. The idea here is that the government will bear some of the risk born by lenders. As the crisis ramped up, it was clear that the risks of loaning money were higher. To try to incentivize banks and other institutions to keep loaning money, the government agreed to purchase a substantial portion of the loans. The lenders were no longer responsible for taking the full brunt if the loan could not be repaid; therefore, they remained incentivized to loan.
Because the Purchase Facilities concept was newer it took more time to get off the ground. While the Loan Facilities were in full swing or winding down by June of 2020, the Purchase Facilities were just ramping up.
One of the quickest Purchase Facilities programs to get off the ground was the corporate bond support. If you owned corporate bond mutual funds in 2020, you may have noticed that your results were higher than we usually expect. In part, you can thank the Purchase Facilities for gain, as their promise to buy corporate debt restored a crashing bond market.
On the slower side of the Purchase Facilities was the Main Street Lending Program, which didn’t really ramp up until the end of the year. It targeted loans to mid-sized companies that had too many employees for PPP but were too small for some of support going to giant corporations. As of December 31, 2020, the program issued about $17 billion in loans.1 This program was tiny when compared to PPP, but this is still new money that has really just started circulating in the U.S. Economy.
With all of these facility programs targeting specific spaces in the market, it’s no wonder the market isn’t fighting back. The 2008 Financial crisis really solidified the Loan Facilities as a tool, and now the COVID crisis has likely done this with the Purchase Facilities.
1Donald P. Morgan and Steph Clampitt, “Up on Main Street,” Federal Reserve Bank of New York Liberty Street Economics, February 5, 2021, https://libertystreeteconomics.newyorkfed.org/2021/02/up-on-main-street.html.
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