Why Is The Fed Ready To Buy Stocks?
If Trump believes in a free market, he must not be watching the Fed.
To my conservative friends, I have some disconcerting news for you. According to the analysts at Seeking Alpha (and a few other news sources), the Federal Reserve Bank, the largest central bank in the world, has filed the paperwork required to buy stocks. The obvious reason is to prop up the stock market, but I think it’s worth asking, who exactly, owns the majority of stocks in America? The top 10%. The rest of us don’t own enough stock to derive any appreciable income or have any influence on how the largest companies do their business.
Believe it or not, there are people who own enough stock that they could live off of the dividends alone. Let’s say you own a million shares of Southern Company, a gas and electric utility. There are more than a billion outstanding shares of Southern Company to own. They are listed as “SO” on the exchange and SO pays a quarterly dividend. According to Dividend.com, the SO share price is $52.61. The price of admission to this ride is now $52 million.
Here is the eye-opener if you haven’t had your coffee yet. SO paid 64 cents per share last quarter. And 62 cents a share the quarter before that. 64 cents a share on a million shares is $640,000 a quarter. Every three months, a shareholder with a million shares of SO is getting a payday. That works out to $2.4 million a year, just for holding stock. Someone with 10,000 shares would see $6,200 every quarter. That’s $24,000 a year for not even working. This works out to an annual return on investment of about 4.5% a year.
The Fed is preparing to buy stocks with money “printed” by the Fed. According to Seeking Alpha’s video on the same topic, the Fed is preparing to buy stocks in Amazon, Alphabet, and many other big companies. All of this is happening during the Trump Administration, with a Fed Chairman appointed by President Trump. I haven’t heard a word about these plans from Trump, and I have to wonder why he is so mum.
The same conservatives who have no complaints that the Fed is ready to buy stocks, and has already been buying bonds and corporate debt, also get a little riled up about a very simplified tax system for corporations that allows the government to own shares of corporations to secure tax payments. Dean Baker is an economist with the Center for Economic Policy and Research (CEPR), a liberal economics research institution. Mr. Baker came up with this idea to simplify corporate taxation, as reported by the LA Times in 2017:
Instead of traditional taxes, the government could require corporations to turn over a portion of their stock, say 25%, in the form of non-voting shares. The government would benefit from any dividends or share buybacks but would have no voice in running the company.
This is an incredibly simple way to tax corporations. The government owns a portion of outstanding shares, non-voting shares, and collects a dividend when a dividend is paid. If the company is sold, the government is paid. If there is a share buyback, the government is paid. If the share splits, the government has more shares. Best of all, it deprives an entire industry of some income, the tax gaming industry.
Such a simple solution would allow a company to devote more time to innovation and customer service, and we all love good customer service. I don't know what we’d call this tax plan yet, maybe we can call it the Simple Share Tax. Even a politician could understand it. It is easy to manage and it is very difficult to cheat. Baker continues in that article:
This system would eliminate almost all opportunities for gaming since a company would not be able to deny the government its share of profits unless it also withheld profits from its other shareholders. And we would not call that “tax avoidance” but outright theft — the sort of thing that gets people sent to jail.
I have pointed out this idea to some of my conservative friends. Let me tell you what one of them said:
DB is the same writer who wants the government to own a portion of private corporation’s stock. That disqualifies him from further serious consideration.
Do we hear conservatives screaming vitriolic profanities as a result of the Fed’s plan to buy stocks? We’ve heard nothing from them about how the Fed been buying bonds and corporate debt. Still, conservatives are very worried about welfare queens, food stamps, a jacked-up unemployment benefit and other government incentives to not work. If you want to save lives, you might not want some people working during a pandemic.
I think it’s very interesting how conservatives are so worried that the poor won’t work if they receive benefits like food stamps, unemployment insurance, yet say nothing about how much money is spent supporting the assets of the rich during the pandemic.
I have found some common ground with conservatives. We both want the United States to be a nice place to live in. I think the United States would be a better place to live if we stopped worrying if poor people will work if they receive money and food from the government. Perhaps we could show a little humanity by acknowledging that there will always be people who lack the capacity to work and care for themselves. We would do well to consider all the ways we incentivize people who already have plenty of money, not to work for the public interest.
There is clear hypocrisy on display today. More money for the poor is a disincentive to work. More money for the rich is not. My conservative friends have been silent on this point. I’m still waiting for a response.