Why Are Bankrupt Stocks Rallying?
Seems like its not just coronavirus cases that are rallying. But why?
Hertz is the SI unit of frequency. Now it is also the SI unit of bailouts in the US.
If you’ve been following the news as religiously as Moon follows Earth, then you have to know America’s 102-year-old car rental firm has declared bankruptcy. I am talking about Hertz if you couldn’t catch up.
Yet, their share prices are higher than they were before the sad announcement.
Did you say ‘what’? Yeah, I heard you.
It is not Harry Potter induced magic, economists call it —
The moral hazard of unlimited bailouts — sponsored by the Fed and the US Treasury.
Economists use this phrase to refer to the bad incentives that are created for companies affected by the recession. Especially when they know, they would be rescued.
Rescued how? By getting the Fed and the US Treasury to pumping trillions of dollars into the seemingly innocent markets.
Both the organizations have respectively, pumped about 4.5 trillion USD and 2.3 trillion USD till now in the coronavirus-affected economy.
This had previously happened in 2008 — when the US government purchased toxic assets to strengthen its financial sector. This is happening again.
This sudden increase in the liquidity of the market has made it crazy. So however bad any stock is, it is giving high returns to the investors.
Read more about the effects of this bailout here by Concoda.
