The economic debate of the day centers on whether the cure of an economic shutdown is worse than the disease of the virus. Similarly, we need to ask if the cure of the Federal Reserve getting so deeply into corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds is worse than the disease seizing financial markets. It may be.
The Federal Reserve is not allowed to purchase or lend against securities without government guarantee, which coincidentally happens to be the stated goal of new special lending programs being created to navigate the current financial crisis. From the article:
So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position. What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.
In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.
This scheme essentially merges the Fed and Treasury into one organization. So, meet your new Fed chairman, Donald J. Trump.
BlackRock to handle The Feds infinite bond buying program https://t.co/xJoeL6Kgw6— Main St Econ (@JayAllenEcon) March 28, 2020
Blackrock with buy assets for the US gov with printed money from the Fed. Which assets?https://t.co/gyf9mq48mq— Chugga (@ChuggaCorp) March 28, 2020