This week, US President Donald Trump seemingly caved in to pressure from failing airplane manufacturer Boeing Inc. and others, who have been lobbying for financial assistance for the aerospace industry from the federal government, in the form of $60 billion worth of loan guarantees. The background, of course, is the rapidly evolving global Corona virus emergency.
Boeing in particular finds itself in the epicentre of the crisis, as an almost complete cessation of global air travel adds to the problem the company faced in the aftermath of two fatal crashes of their Boeing 737 MAX, which grounded 387 aircrafts worldwide. Boeing’s stock price has crashed through $100, a precipitous fall for a stock that was worth almost $340 a month ago.
And Boeing is indeed in trouble. The company already posted its first annual loss since 1997 last year, losing $636 million, and a weak balance sheet is maybe even more of a worry: total debt rose to $41.1 billion last week as the corona virus crisis engulfed the company and they drew down on an existing $13.8 billion commitment.
But it wasn’t always that bad. Just one year back, in 2018, net income was a record $10.5 billion, and in the decade before that the company made around $5 billion a year, on average. But sadly, with interest rates at super low levels due to the Federal Reserve’s ultra-low interest policies (the effective interest rate on their debt, as of December 2019, was 3.73%, according to Gurufocus), Boeing was not incentivised to save for a rainy day. Instead they spent their free cash – most of it borrowed – on stock buybacks: since 2013, Boing has spent $43.4 billion on buying its own stock in the seemingly ever-increasing markets. In that period, they also paid dividends totalling more than $35 billion.
Now, with a massive hole in the balance sheet and spiralling losses, the company is going hat in hand to the federal government, asking for taxpayers to be tasked with bailing them out. The moral hazard is self-evident, and it is Federal Reserve policy that has fertilised the ground for corporations to behave so recklessly. Hordes of companies have done exactly what Boeing did, and now as the crisis hits, they have nothing to cushion the fall; they are houses of cards built on cheap borrowing. If governments bail them out, it will confirm that you can privatise gains and socialise losses across the economy, as was proven the case for the big banks in the 2008 great financial crisis.
With central banks across the world cutting rates and reembarking on quantitative easing, as soon as the Corona virus is under control and normality returns to markets, the incentives will continue to be for corporations to leverage up on the cheap. There are, broadly, two ways this can play out in the long run: the free market solution is for central banking to be ended and interest rates to be set in the market, and for bailouts to be consigned to the trashcan reserved for bad policy ideas. The statist solution is for governments to intervene and take ownership or in some other way (taxes) assume control of gains as well as losses, as the general public, correctly, laments being forced to bail shareholders out.
We fear for the future.