Tesla Shows Why We Shouldn’t Enable The Fed’s Continued Search For A Purpose

My colleague at RealClearMarkets, Joe Calhoun, recently pointed out to his Alhambra Partners clients that Tesla
TSLA
“has always been a high-risk speculation, valued at billions of dollars even as it teetered on the edge of bankruptcy.” Joe is skeptical about the valuation investors have placed on Tesla, but that’s not the point of this column.

Instead, Joe’s analysis is a reminder of a frequent theme expressed here over the years: no company ever runs out of money. Ever. What companies run out of is investor trust. Without presuming to understand the good or bad of Tesla, the simple truth is that investors trusted Elon Musk’s long-term plan for the company. As a result, they kept it afloat when perhaps even if its founder started to question its viability.

That Tesla is still around, and surely thriving in a valuation sense, is a reminder that the Fed’s Main Street “lending facility” was always a dopey non sequitur. Anyone with a clue knows this simply because no one was calling for a Fed “lending facility” in February of 2020. They weren’t because the economy was viewed as healthy.

A month later the calls for the Fed to liquefy companies were deafening. Why was that? To answer would be to waste words since the sentient among us understand that lockdowns are by their very name an erasure of liquidity.

So with the economy wrecked by abjectly stupid politicians who chose to fight a virus with economic desperation, those with access to the money of others (politicians) rushed to throw money at their errors. The Fed is one of the main entities that Congress outsources its economic interventions through, and soon after a “lending facility” of the $500 billion variety was set up by the central bank and the U.S. Treasury. It should be said that this was done needlessly.

As Tesla’s example reminds us, near-bankrupt or money-losing companies represent opportunity for investors and lenders. Investors are rewarded with greater amounts of equity when they liquefy what’s in trouble, and lenders enjoy higher rates of interest on loans made to companies in trouble. Markets work.

To all of the above some will reply, and did reply, that markets weren’t working in the spring of 2020 precisely because of the lockdowns. Which of course speaks to how central bank lending facilities were and are a non sequitur. The lockdowns were the source of corporate difficulties, but more important the lockdowns were the liquidity problem. Investors were skeptical about committing capital to companies that politicians wouldn’t allow to operate, which means Fed “lending facilities” were superfluous in addition to being non sequiturs. Businesses in the spring of 2020 didn’t have cash-flow problems as much as they had lockdown problems. Money in 2020 missed the point.

Better yet, the narrative mercifully changed. While the Fed’s Main Street Lending Program was rolled out, it quickly found few takers. A virus that had plainly been meek in its epicenter (China) soon enough revealed itself as meek in the U.S. As opposed to the virus rampaging across the U.S. only to kill in indiscriminate fashion, it rapidly became clear that most didn’t know they had the very virus that nail-biting politicians had chosen to shut the economy down over, and that deaths associated with the virus largely fell on those who were already very sick, old, or both. Although its front page has been chock full of alarmist headlines since March, the New York Times
NYT
has regularly and soberly pointed out inside alarmingly-titled news articles that nearly half of U.S. deaths related to the virus were associated with nursing homes.

The Fed’s aforementioned lending facility proved superfluous for two reasons. For one, businesses once again never run out of money. With it apparent that the virus was in no way going to kill off the people who make up the world’s most dynamic economy, liquidity returned for U.S. businesses. To this day some say the Main Street program liquefied markets, which is the equivalent of saying Aliquippa, PA would suddenly thrive if the Fed helicoptered a few billion into its downtown. No, a lack of liquidity in Aliquippa is a consequence of a lack of productive endeavors there. Money would be superfluous. So was it amid stringent lockdowns. The realization that a meek virus ensured an eventual end to needless lockdowns logically freed up capital that had been sidelined by what was needless.

For two, well-run businesses no longer needed government help once the less lethal nature of the virus became apparent. As for those that did, neither the Fed nor the Treasury were in the business of grants; as in doling out money they expected to lose. What this means and meant is that the banks that were going to administer the Fed’s lending, and that would have had a portion of the loans on their books, could not lend to the businesses that market-driven lenders had rejected. Main Street didn’t make sense, nor does it.

Yet the Fed, and in particular Chairman Jerome Powell, wants to keep the facility in operation. Well, of course he does. The Fed has long been shunned as a lender of last resort to solvent banks, so here’s a chance to expand its mandate to businesses in general. No thanks should be the answer on its face. That a Biden administration would likely try to turn the Main Street lending facility into a grant program, or “social justice” program just makes what’s unnecessary dangerous. And anti-economic growth.

Tesla is instructive here. It’s a reminder that government can’t invest or loan, period. Think about it. If the virus had spooked politicians in 2017 instead of 2020, it’s likely that a near-bankrupt Tesla would have been refused government help. In 2020, Tesla doesn’t need it. Get it?

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