Deep capital markets mean fast access to cash for the wealthy
One of the biggest silver linings of the current crisis is the fact that the U.S. has the deepest capital markets in the world.
Why it matters: The stock and bond markets are places for people to store their wealth in case they need it in the future. We're currently experiencing a major global crisis in which millions of individuals and businesses need liquidity. By selling investments, those fortunate enough to have stored wealth can access much-needed cash almost immediately.
- Think of the market as a rainy-day fund, and the COVID-19 pandemic as a thunderstorm of unprecedented magnitude.
- The global selling pressure has driven down the prices of stocks and corporate bonds, which is exactly how markets should work. They went up when people were saving their money, and now they're going down when people are withdrawing it.
The big picture: Wealth is deferred consumption, a way of storing your income so that you can use it in the future. That storage always comes with risks, to both the upside and the downside.
- Sometimes investments rise impressively in value, as stocks broadly did over the past decade. Sometimes they are eroded by inflation, or get hammered by a low-probability event such as a global pandemic.
How it works: The Federal Reserve has effectively unlimited capacity to provide the liquidity needed to keep the markets functioning. Meanwhile, risk-averse global investors have similarly unlimited desire to buy Treasury bonds to fund any U.S. stimulus.
- This isn't a financial crisis. Markets aren't the problem; they're the solution. They provided the money that companies and entrepreneurs needed to grow, and, thanks to the Fed, the markets now provide the same companies with cash to get them through the current crisis.
The bottom line: Thanks to the markets, $454 billion in the just-passed stimulus bill will be leveraged up to more than $4 trillion of total lending to needy companies. At the median wage of $936 per week, that's enough to support 50 million workers for well over 18 months.
Markets would have collapsed over the past couple of weeks if it weren't for the "whatever it takes" attitude of the Fed.
- The Fed's muscle memory from 2008-09 kicked in, and almost every financial crisis program was resuscitated. (Similarly, one big reason for the success of Hong Kong and Singapore in navigating this crisis is that their own memories of SARS and H1N1 kicked in very quickly.)
- Banks didn't need to be rescued this time around because after the financial crisis they were forced to take on much more capital. America's banks now have more than $1.7 trillion of "tier 1" capital — basically the amount of losses that they can easily absorb without going insolvent.
- The banks' strength has made them an important part of the government's rescue package. They are being asked to lend trillions of dollars of bailout money to small- and medium-size businesses across the country, with the loans guaranteed by the government.
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