Government “economics”: a fistful of dollars
With one eye on the stock markets, the other on elections, and another reluctantly turning to the coronavirus pandemic – was that three eyes? – the Trump administration announced plans to pump $500 billion into the pockets of Americans.
Another $500 billion will go to corporations affected by the pandemic. Think airlines, casinos, and some relief for small businesses. (Yes, casinos are asking for money, despite having an actual license to make it.)
The bailout for corporations follows the trillion-dollar Trump tax cuts in 2017. It rivals the $900 billion the government spent bailing out banks in the aftermath of the financial crisis that they caused.
Senator Chuck Schumer claims that 70% of the Trump tax cuts went into stock buybacks. Bloomberg News reported that U.S airlines spent almost 96% of their free cash flow on buybacks from 2010-2019.
These stock buybacks, they infuriate me.
The airline industry alone bought back $13 billion in their own stock over the last two years.
— Chuck Schumer (@SenSchumer) March 19, 2020
As CNN noted, “Wall Street loves buybacks because they also artificially boost per-share earnings, even if underlying profits remain stagnant. Famed Yale professor Robert Shiller hascalled buybacks “smoke and mirrors.” Buybacks provide demand for shares, lifting the stock price.”
Forget airlines, fly helicopter!
The propping up of corporate America knows practically no bounds. The Fed has slashed interest rates to around zero and launched yet another quantitative easing package. This one is worth $700 billion.
After 12 years of quantitative easing following the global financial crisis, one might have been excused for thinking there were few levers left for the Fed to pull. Fear not: interest rates can always go negative.
Helicopter money was coined by economist Milton Friedman in 1969. Ben Bernanke spent his tenure as Fed Chairman fending off ridicule for once seemingly being supportive of the idea behind handing out free money. They called him Helicopter Ben.
Helicopter Ben is no longer at the Fed. But Sikorsky Don is in the White House, and he’s been pressuring the Federal Reserve to slash interest rates since his inauguration. The big difference between Sikorsky Don and previous helicopter money advocates is that his choppers tend to land primarily on the helipads of multinational corporations.
For a few dollars more
That $500 billion to consumers and households? We might need to save it to fund the $500 billion corporate bailout… to airlines with no travelers, and whose sole purpose appears to be artificially-inflating their own stock prices. Because the last time I flew, the airlines continued to suck at everything else.
Well, at least something in the air is soaring.
On the topic of helicopters, the team behind DeFi leader MakerDAO helicoptered in stablecoin USDC to ease DAI back to parity with the US dollar when a liquidity crisis hit the protocol after the Ether price slump.
The move was not without its critics (or considerable angst among decision makers at the Maker Foundation). Ushering in a more liquid stablecoin had been discussed previously, but the Foundation had always been cautious of relying on centrally issued stablecoins like USDT or USDC.
But the coronavirus pandemic caused a highly precarious situation that, without intervention, could easily have resulted in the collapse of the promising DeFi crypto sub-sector.
With Ether losing a third of its value in 24 hours on March 12th, DAI soared as investors sought refuge in the pegged currency. A supply and liquidity crisis ensued and the situation exposed flaws in the platform as automatic liquidations were triggered on the ETH positions that collateralized the debt.
With the Ethereum network becoming clogged as traders scrambled to recapitalize, automated Keeper bots liquidated positions. One Keeper was able to purchase auctioned Ether for $0. The Black Swan event posed an existential threat to Maker and the DeFi ecosystem as a whole.
But even when existing governance appeared to be on the verge of failure, the community was able to react quickly enough — and has implemented a Collateral Liquidation Freeze mechanism to prevent future crises of this nature.
Sometimes you need to fly in the big guns
Circle USD’s market cap sits at well over half-a-billion dollars, dwarfing that of DAI, which has a cap around $84 million. By approving USDC to be used as collateral on collateral-backed loans, the Foundation was able to bring liquidity to the platform that allowed for the algorithmically-pegged native stablecoin to restore equivalence to the greenback.
DAI has returned to dollar parity, after hitting all-time highs of $1.11 on March 13th.
The Maker Foundation’s deserves credit for its handling of an ugly situation. Sure, they helicoptered in the support of a fairly centralized stablecoin. But they did so in an emergency and with a great deal of reluctance.
And importantly: they did it to return the protocol to balance, not to flood liquidity into the market to prop up struggling corporations.
The Maker USDC bailout was a courageous and responsible decision. A stark contrast, in other words, to the 12 years of quantitative easing and tax cuts to political donors that have led to a perilously overcapitalized U.S. economy with very few levers left to pull.
Opinions expressed in this column are those of the author.
Paul de Havilland
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