There was a time back in Donald Trumps cherished clean American past when representatives of our government would go out of their way to distance themselves from any notion that anything they do is intended to affect markets directly. It was considered bad form to interfere with markets as we considered our nation the worlds freest economy. A shining beacon of laissez faire for all the world to follow. Interference in markets was considered to be an inappropriate undertaking for the government. It was something about which you would reasonably say “It just isn’t done.” Ah the nostalgic embrace of what might have been.
Shortly after Alan Greenspan, a former acolyte of everyone’s favorite champion of free markets and individual enterprise – Ayn Rand, became the Chairman of the Federal Reserve in 1987 however the stock market had a massive tumble in October, losing more than 20% in a single day. Greenspan sought to reassure markets that liquidity would be forthcoming and additional panic was averted. The Greenspan Put was born.
The bogeyman of the Great Depression has always figured prominently in the minds of economists. Any crash in stocks was always guaranteed to cause panic first in the minds of those who spent their careers studying it. Following that fairly aggressive actual intervention in markets in 1987, rumors started to circulate about a Plunge Protection Team (PPT) under Reagan. This would have been a group ensconced physically either somewhere in Washington or more likely in the bowels of the New York Fed, where debt market operations – purchases and sales in the secondary market – were already undertaken in the execution of monetary policy. Of course every sane person when asked would eschew any belief that such thing as the PPT could exist. After all it would be beyond the pale.
But alas, the Great Financial Crisis has changed everything. I once wrote that real men don’t do QE. This didn’t seem to faze Bernanke and his peers at the Fed who anyway I am sure never read what I wrote. Bernanke, one of those Great Depression scholars Greenspan got onto the Fed after the 2000 crash in order to bring some crazy thinking to the task, went ahead and started buying up truly gargantuan quantities of Mortgage Backed Securities (MBS) and Treasuries, starting on the short end and then moving more and more to the long end of the curve. They did this from early in 2009 until they finally quit buying new quantities in late 2014. They still buy new MBS and Treasuries to replace those that are reaching maturity, so QE is actually still going on in reduced form. The brash thinking Bernanke even went so far as to make explicit what had been whispered about for years, namely that the Fed sought to create a wealth effect by increasing the level of stock prices. He wrote in a Washington Post editorial in November 2010 titled “What the Fed did and why: supporting the recovery and sustaining price stability”:
[H]igher 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.
The Greenspan Put had become the Bernanke Put and stock prices have risen ever since they started, now reaching their second longest bull streak in history. But the progenitor of this outre policy was Greenspan. In an early 2013 (February 18th on CNBC) interview with Maria Bartiromo, Greenspan said, speaking on the impact of the Sequester on the economy:
[T]he issue is how does it affect the stock market. … [T]he stock market is the key player in the game of economic growth. … [D]ata shows that not only are stock markets a leading indicator of economic activity, they are a major cause of it – 6% of the change in the growth in GDP results from changes in the value of stocks and homes.
The video at CNBC has been taken down, presumably at the behest of Greenspan himself or maybe even the Fed, both of whom are or should be embarrassed by the sheer insanity and inappropriateness of what the words said represent, but you can get the gist of it here, here or here. So there you have it. The scion of the greatest proponent of individualism and anti-government feeling in American History in Ayn Rand, turns tail and becomes one of the greatest statists of all time. What was once viewed as wildly inappropriate as an object of government handling has now become just another policy tool. It is tempting to ascribe the fall from grace to the machinations of the Obama administration, for whom, following Alinsky, nothing is inappropriate or beyond the pale as long as it furthers the leftist agenda. But sadly, like so many other things, the fall from grace occurred thanks to someone who should have known better.
And so here we are 8 years after the end of the GFC, more than 6 after Bernanke’s famous editorial and 4 years after Greenspan’s interview with fed funds only a couple of 25 bp hikes above 0 and with stocks making new record highs every day, with record low intraday volatility or range, paying 25 times last years actual GAAP earnings or so in the biggest bubble yet. <sarc>I am sure we have reached a new fed sponsored permanently higher plateau</sarc>. But Yellen better seriously pray that the economy does not actually create any inflation over her stated target of 2% (a stated inflation target other than 0 being another anathema to formerly staid central bankers) requiring her to raise rates, or the Feds real main policy tool, engineering high stock prices, may become impossible to wield any longer.
The worst effect of the obsession of Greenspan with manipulating stocks markets higher is found in his own statement – “stock markets a leading indicator of economic activity, they are a major cause of it”. By using the levers of power at his disposal Greenspan reduces the power and validity of the price signal that stock markets generate. He introduces noise into the system. Like a Potemkin Village that may fool people for an indeterminate and potentially long period of time. But by degrading the price signal, the most important signal there is in capitalism, he unwittingly introduces inefficiency and hence lowers the total future wealth of the polity, reducing the optimality of the outcome. Statists do what statists do. They cannot help but tinker – with the best intentions of course. Sadly that has a cost, and one that will go unknown and unheralded by most, and actually applauded by many.