Barnaby Monk 1 p.m., April 23
Stocks Might Be More Than 50% Lower without Federal Reserve Boosts
A study by the Federal Reserve Bank of New York may validate what cynics like me have been saying for many years: statements and actions by the Federal Reserve are pumping up the stock market tremendously. The study looked at stock market action in the 24-hour period before the Fed's regular statement on interest rates and the economy; the Fed's open market committee makes eight such announcements a year. According to CNBC.com, the study found that the market has a tendency to rise in the 24-hour period before the release of that statement, presumably on expectations that the Fed planned to lower short term interest rates, buy long term bonds to drive down long rates, or take some similar action to dump more money into the economy. If you subtract those 24-hour periods, the Standard & Poor's 500 would be at 600, says the New York Fed. It closed Friday at 1356.78. So stocks would be down more than 50%.
Wall Street for decades has referred to the "Greenspan put" or the "Bernanke put" -- the Street's belief that the Federal Reserve would keep the stock market up. Some people will argue with this study: for example, I would say that stocks react to other Fed statements, and expectations of actions, such as by regional presidents, or by the chairman at times other than after the open market committee meetings. Chairman Ben Bernanke talks to Congress committees Tuesday and Wednesday, for example. If he wants to, he can make statements that will run up the market.
The Fed has mandates to hold down inflation and keep employment up. The Fed has no mandate to run up the stock market. The Greenspan put and the Bernanke put have had the effect of exacerbating the dangerous income and wealth inequality that is walloping the middle class, and thereby hurting the economy. The richest 10% and 1% overwhelmingly benefit from a stock runup. Others have small stakes, often indirect, in the stock market. The conclusion is obvious: Wall Street gains from Main Street's pain. The Fed would have no justification to lower rates if the economy were strong. Bad economic news is good Wall Street news.
There is one rationale the Fed might have for this policy. Example: The California State Teachers' Retirement System made a 1.8% profit on its investment in the just-ended fiscal year. Its official forecast is for 7.5% a year. Without the Fed talking about and instituting low interest rate policies, thus goosing stocks, think where pension funds, cities, and other institutions might be. So the Fed could argue that its manipulation of the stock market could actually fall under its mandate to keep unemployment lower.
More like this:
- Bubbles: Greenspan, Bernanke could have learned something in San Diego — March 13, 2013
- Fed Manipulates Stocks Again — March 26, 2012
- Fed Comes to Market's Rescue — Aug. 9, 2011
- Greed, Gambling Society — June 18, 2008
- Beyond Our Means — Oct. 11, 2007