Companies need to borrow, and spend too, to help economy
TEXT OF STORY
Kai Ryssdal: The mechanics of what the Federal Reserve did earlier this week — that thing where it’s going to pump $600 billion into the economy — are actually pretty simple. It goes out and it buys lots and lots of government bonds. That pushes interest rates down for banks, and, eventually, consumers and companies, too.
It’s really cheap right now for companies to borrow money. And they have been all week. Now if they’d only actually spend it.
From New York, Marketplace’s Stacey Vanek Smith has more.
Stacey Vanek Smith: When the federal government pushes interest rates really low, it’s basically calling on companies to borrow. The day after the Fed’s announcement, companies like Coke and General Electric raced to issue more than $12 billion in corporate bonds.
NYU economist Lawrence White.
Lawrence White: If you can lock in a low interest rate, that means you’ve reduced your costs and that gives you more surplus that you can use to reinvest in the company.
The Fed wants companies to take that cheap money and use it to grow and hire people. But Conference board economist Kathy Bostjancic, says that won’t happen if businesses are worried about the economy.
Kathy Bostjancic: If they think the consumer’s going to stay soft, then companies aren’t going to expand because the demand just won’t be there.
Companies have said they’ll use the cheap money pay off more expensive debt and buy shares of their own stock. NYU’s Lawrence White says that’s not enough to help the economy.
White: There’s nothing wrong with repaying higher cost debt, that’s a legit use for this kind of borrowing, but by itself that doesn’t generate more jobs for the economy.
Two years ago, the Fed bought nearly $2 trillion worth of bonds. Companies borrowed billions and sat on it.
In New York, I’m Stacey Vanek Smith for Marketplace.
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