The Vulgar Fed

I grew up with a lot of rich people.  You could tell what the mothers of these peopple thought by watching how they reacted to different people or actions.  One would never do such things as picking your nose or farting or spitting or swearing.  These were the types of things that coarse and vulgar people did.  Of course one did not want to be one of the coarse or vulgar people so one did not do these kind of things.  Said another way, there were certain kinds of things that just are not done in polite society.

Now in polite political society, the kind who believe that the Constitution of the United States was one of the most important works of genius in the history of mankind, there are also certain things that are just not done.  In a land where the government is conceived to be limited – limited to providing dispute resolution systems, national defense and not much else – one of the kinds of thing that is just not done is for the government to manipulate markets, purposely or otherwise.  Well we can start to see where this is going.  As late as the start of the Great Financial Crisis of 2008, one was considered a bit outre if one seriously entertained that there was a Plunge Protection Team whose job was to manipulate the stock markets.  This all changed of course after the GFC.  Apparently those vested with great powers could not control themselves in the face of such chaos and determined that the rules of nicety that had heretofore determined the bounds of acceptable conduct no longer applied to them.

When and how did this happen.  A great clue came in the unbelievable Washington Post editorial penned by Ben Bernanke explaining that the great uncles in Washington with their nannies were going to make all the boo-boos go away for infantile scared America.

The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

My bold and italics.  At the time I read this I could not believe it.  Here was the Fed Chairman gloating that America was no longer America.  No more taking lumps or letting the markets set their own course as the great scorekeepers of human affairs.  No.  The Fed now considered stock prices as coming under their special nanny remit and by God they would see to it that the direction of prices supported the current incumbent at 1600 Pennsylvania Avenue.  I became sick.  And this was before the Supreme Court made their country killing ruling on Obamacare.

But this was not Ben Bernanke’s idea.  No, the Bernanke put is merely the successor to the Greenspan Put.  Only more institutionalized.  More antiseptic.  Softer.  Nicer.  Just go to work people, nothing to see here.  Baaaaa.

A further clue as to the historic genesis of this outlandish and outrageous idea that the Fed is the keeper of the equity markets (and we still are under this yoke with the S&P500 breaching 1850 today) came in an interview I saw of Alan Greenspan with Maria Bartiromo on CNBC in February 2013.  The key exchanges are in the 2 or so minutes in the viedo below.  The full video can be found here, here, here and here.

Greenspan the Manipulator

In the interview Greenspan says that the sequester will be impactful but if they (the Fed) can keep stock prices up then things will be fine.  He also says later that stocks are not just an indicator of economic health but one of its causes through the wealth effect.  Unlike the Greenspan era, when interest rates were actually positive, in the era of ZIRP and QE Infinity, the Fed uses the term Portfolio Balance Channel to refer to the idea of stealing returns from savers and forcing them into stocks if they want a return at all.  In any event, this is an admission by Greenspan that the fabled Greenspan put was a real, tangible intended thing.

How did Alan Greenspan become obsessed with the level of the stock market?  Indices of economic activity like the ECRI index use the level of stock prices in their formulae.  The level of such indices is an input in decision making by business leaders.  The level of stock prices can therefore affect the investment decisions of business and thus impact the real economy on way or the other.  There are at least four other ways that stock prices affect the real economy.  First, falling stock prices negatively impact sentiment of the common man and vice versa.  Sentiment is correlated with spending.  Second, stock is a currency used by corporations in mergers and acquisitions.  Low stock prices mean lower merger activity and so less efficiency and activity generally theoretically.  Third, stock prices may be implicated in lending covenants at banks for business and so falling stock prices may cause credit problems which then cascade through the economy.  And fourth, stock values are a major component of 401k and other retirement savings and that has a substantial psychological impact on savers.  There are probably other ways as well.

Still, does an of this mean that it is RIGHT for policymakers to target stock prices?  I would say no.  To me it just looks like something vulgar, something that just should not be done.  It is another indicator that the nature of our Republic has changed, and for the worse.  The worst part of the Fed targeting stock prices is that it misleads the public about the state of the nation’s affairs.  People do look to the averages and it has an impact on their sense of the state of things.  There is a dichotomy opening up between what the markets are saying and what the sense is on the ground.  This must strike people as a disharmony at some point.  After all, two of the best stock performances of the last 10 years were in Zimbabwe and Venezuela.  But a rising stock index was not indicative of a strong economy in those cases, but of a collapsing society with runaway inflation.  That is not the case here, yet, but the point is one must see through the haze.  I do not think things are as rosy as a quick glance at the level of the S&P500 or Dow would indicate.

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