"buying crap" is a wild exaggeration. The Fed is injecting liquidity into markets where credit ratings are creating second and third order effects that will result in liquidity crunches.
To make this clear with an example...many bond funds, active or passive (E.g., ETF, mutual fund, etc.), have strict covenants guiding their investments.
In a simplified system of:
Investment grade: A, B
non-investment grade: C, D
the funds may only be able to purchase A and B rated bonds. Additionally, they may be forced to sell a bond which has a rating change from B to C or below.
Since many ratings agencies are revising ratings lower across the board, there is mass selling of these bonds, just as the companies attempt to raise money to finance their operations. It's also very typical for ratings agencies to essentially trail the capital markets. So as a bond decreases in value, the probability of a credit rating change increases.
This alone could cause manufacturing, energy, or any capital intensive business to fail as their interest payments skyrocket and they lose access to financing.
The probability of default for these companies skyrockets in this scenario. If the fed props these markets up temporarily, it's extremely likely the defaults will be far less severe.
To make this clear with an example...many bond funds, active or passive (E.g., ETF, mutual fund, etc.), have strict covenants guiding their investments. In a simplified system of: Investment grade: A, B non-investment grade: C, D
the funds may only be able to purchase A and B rated bonds. Additionally, they may be forced to sell a bond which has a rating change from B to C or below.
Since many ratings agencies are revising ratings lower across the board, there is mass selling of these bonds, just as the companies attempt to raise money to finance their operations. It's also very typical for ratings agencies to essentially trail the capital markets. So as a bond decreases in value, the probability of a credit rating change increases.
This alone could cause manufacturing, energy, or any capital intensive business to fail as their interest payments skyrocket and they lose access to financing.
The probability of default for these companies skyrockets in this scenario. If the fed props these markets up temporarily, it's extremely likely the defaults will be far less severe.