Fed needs to throw a lifeline to junk bonds

The Federal Reserve seems determined to do whatever it takes to help protect the US economy from being devastated by coronavirus-related shutdowns. It’s buying so many bonds that its balance sheet is approaching $6 trillion:
Traditionally in recessions, the Fed buys increasing amounts of government bonds, which reduces interest rates. That usually lowers borrowing rates for businesses as well, helping them ride out an economic storm. But in a situation like the present one, that’s unlikely to be enough. Because shutdowns and the danger of disease are threatening many businesses with bankruptcy, they’ll have pay interest rates that reflect the rising risk of default, making it costly and hard for them to borrow in private markets even with Treasury rates at or near zero.
If companies are unable to roll over their debts, many will go bust, throwing more people into the overloaded unemployment insurance system. Furthermore, banks that lend money to companies and hold corporate debt will also be put in danger. That could cause a financial crisis whose impact long outlasts the shutdowns, turning a one- or two-year recession into a lost decade.
The Fed thus needs to buy lots of corporate debt as well to keep corporate borrowing rates low. It has started doing this via a series of new facilities. These include the Commercial Paper Funding Facility, which buys short-term corporate debt; the Primary Market Corporate Credit Facility, which lends money directly to companies by buying newly issued bonds; the Secondary Market Corporate Credit Facility, which buys up existing corporate bonds in the market; and, in a few weeks, the
Main Street Business Lending Program, which will lend money to small and medium-sized companies.
These programmes required some creative legal maneuvering. Because the Fed, unlike some other central banks, is only technically allowed to buy government bonds, these lending facilities will actually be separate entities funded by the Fed — basically, like shadow banking, but for the central bank. But it’s worth it. There’s no reason to punish companies for failing to see a history-changing, once-in-a-century pandemic, or anticipate the shutdowns that would result. A wave of corporate bankruptcies won’t free up resources for more productive activities as in normal times; thus, it wouldn’t make the economy more efficient or healthy in any way. Nor would a wave of bank failures. US businesses are, for the most part, perfectly viable under normal conditions.
The goal should be to get them back to their previous state as fast as possible after the shutdowns are over, and these Fed lending programs help accomplish that goal.
—Bloomberg

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion