Did unconventional interventions unfreeze the credit market?

By Hui Tong and Shang-Jin Wei, newly relevant!

This paper investigates whether and how unconventional interventions in 2008–2010 unfroze the credit market. We construct a dataset of 198 interventions for 16 countries during 2008–2010 and examine heterogeneous responses in stock prices to the interventions across 7,873 nonfinancial firms in those countries. Stock prices increase when the interventions are announced, particularly for firms with greater intrinsic need for external capital. This pattern is corroborated by subsequent expansions in firm investment, R&D expenditure, and employment. Among various forms of interventions, recapitalization of banks appears particularly effective in channeling the intervention effects from financial to nonfinancial sectors.

That is from the new issue of AEJ: Macroeconomics.

Comments

Was the $3000 ventilator (Project Aura) killed by big business?

https://www.nytimes.com/2020/03/29/business/coronavirus-us-ventilator-shortage.html

Shorter summary: bailouts work to keep firms from going bankrupt.
I've asked TC to opine why a bailout is superior to a bankruptcy. The only thing that comes to mind is that an ongoing firm is more valuable to society than one that has to go through Chap. 11 and reemerge months later, after bankruptcy lawyers get their cut. Whether this is worth the taxpayer being on the hook for a bailout vs a bankruptcy, and the moral hazard question for future bailouts, is an open question? That said, after a few years all the bailouts of 2008-10 paid for themselves (in return of taxpayer money) at least in the USA, it is said.

+1. Gary Leff made a good post about this for the airline industry. Bankruptcy should have been the first option, not bailouts.

https://www.mercatus.org/publications/covid-19-policy-brief-series/case-against-bailing-out-airline-industry

I think it's a deep underlying fear that markets won't work. That if we let bankruptcy takes its course then nobody will invest in airlines because they could lose their investments. Which of course is circular reasoning. That's how markets work! At a low enough price, somebody will see a deal in any market. Smart investors will want airlines to carry a reserve for crises that predictably come every decade so that they can live to expand their market share when their competitors go out of business.

The other fear is that it will be that bankruptcy will be too disruptive. We can minimize that with pre-packs and DIP financing so that we don't burden the courts (who also need to flatten the curve) and business can continue running as the details get sorted out.

If bankruptcy is for some reason not an option, then bailouts should come with the strictest terms including, if warranted, the use of nationalization. If the public is forced to become an investor, then they must be an owner too. The current separation of investment and ownership that we seen in this bailout and the last makes little to no sense.

Still in the rut. Can't change to first gear.

My lineage is troubled, but my best half flaunts it.

In the outpost of the 'new' empire

Generals always fight the last war. And economist always fight the last recession. This time it's different. Boosting asset (stock) prices with aggressive monetary stimulus won't work. We've relied on the false prosperity of rising asset prices for so long that many have come to believe the propaganda.

David Beckworth, of the Mercatus Center, would probably agree with you. He has called for helicopter drops on Main Street, as opposed to helicopter drops on Wall Street ( conventional quantitative easing).

I think Tyler Cowen needs to consider this viewpoint.

By the way, Stanley Fischer, former Vice Chairman of the Federal Reserve and former Governor of the Bank of Israel and former professor at MIT and the University of Chicago, has also come out in favor of helicopter drops... on Main Street.

But there's Africa.

RIP Pape Diouf. I am enjoying my patisserie.

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