Federal Reserve

At Least the Federal Reserve Can Help Those Playing the Stock Market

Otherwise, evidence for positive outcome from quantitative easing slim, says study from Federal Reserve Bank of St. Louis.

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Stephen D. Williamson of the Federal Reserve Bank of St. Louis last month issued a study  called "Current Federal Reserve Policy Under the Lens of Economic History: A Review Essay."

CNBC ran a good summation of it, and they point out something Williamson himself didn't really draw attention to while mostly writing off the past 7 years of quantitative easing as not accomplishing many of the central bank's own goals:

as for spurring inflation, reducing employment or otherwise generating sustained economic activity, the results, particularly for QE, are "at best best mixed." In addition to muted inflation, gross domestic product has yet to eclipse 2.5 percent for any calendar year during the recovery, while wage gains, and consequently living standards, have been mired around 2 percent or less.

"There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed—inflation and real economic activity."

But what might Federal Reserve policy have helped achieve?

The primary place where QE seems to have worked is in the stock market, where the S&P 500 has soared by 215 percent since the recession lows in March 2009. Elsewhere, though, deflation fears have permeated and interest rates have remained low.

Andrew Huszar, who managed a mortgage-backed security purchase program for the central bank, admitted it did more to prop up Wall Street then to help most Americans back in 2013:

Despite the Fed's rhetoric, my program wasn't helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn't getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash….

See Reason's 2014 set of essays on why predicted inflation has not (yet) resulted from the Fed's years of QE-ing.

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11 responses to “At Least the Federal Reserve Can Help Those Playing the Stock Market

  1. Sorry, Brian, you both missed one of the very biggest points — the most critical — and the most obvious. Was it QE that boomed the stock market? Or near-zero returns on interest-bearing instruments?

    Imagine you run a pension fund. Assume your historic risk strategy had caused 35% of your assets to be invested in interest-bearing accounts. Interest crashes to 1% or less. Do you leave your 35% earning 1% … or has the risk/reward ratio shifted heavily into equities (stocks).

    What do you do? Unless you’re a total dumbass, you switch almost all that 35% into stocks, right? Pension funds are worth over $25 trillion, more than the entire New York Stock Exchanges. So this is a LOT of shifted assets. Stock prices explode, purely on the Law of Supply and Demand. .

    But that demand is temporary. What all the geniuses are missing is, when interest rates return to historic levels … trillions of dollars flow out of equities … essentially the same dollars that boomed stock prices. And when Demand declines (all else remaining equal) what happens to prices?

    Plus, of course, a return to historic interest rates will be a MASSIVE hit on servicing the federal debt. Golly damn. We’re fucked.

    1. Hihn: We’re fucked.

      +1 General Custard

    2. Yep, we’re basically in the same exact trap that Japan is is now.

  2. Ha Ha Fed…..but shit, what Hihn said.

    (also it’s not just the search for returns that goosed the market, corporations are borrowing at ZIRP and using the money for stock buybacks).

    1. “corporations are borrowing at ZIRP and using the money for stock buybacks”

      “Since 2009 companies have spent $2.4 trillion on buybacks,…”

      (smirk) Compared with over $10 trillion from pension fund conversions …. as Reason’s braying jackass bullies continue humiliating themselves with mindless groupthink.

      http://www.bloomberg.com/news/…..ook-better

      (walks away laughing)

  3. There is a guy that knows what time it si.

    http://www.Total-Privacy.tk

    1. You can asy that again!

  4. The primary place where QE seems to have worked is in the stock market, where the S&P 500 has soared by 215 percent since the recession lows in March 2009. Elsewhere, though, deflation fears have permeated and interest rates have remained low.

    No, no! It was Teh Lightworker’s great policies that have made the market boom! Which ones you say? You know…those ones….when he… RACIST!

    /derp

  5. Despite what may have been politically possible to said at the time, the obvious purpose of the program was what this article states. To recapitalize banks. This avoided a government takeover of the large numbers of insolvent banks. Recapitalization was probably the better of the options, at that time. And the only politically viable one as a wide scale shuttering of commercial and investment banks was not going to happen. A separate result was to make banks profitable enough to pay politically motivates fines for essentially doing the governments bidding during the mortgage bubble years.

    1. Despite what may have been politically possible to said at the time, the obvious purpose of the program was what this article states. To recapitalize banks. This avoided a government takeover of the large numbers of insolvent banks. Recapitalization was probably the better of the options, at that time

      Granted, but you just pissed off the Purity Posse!

      When government directly causes the disaster — like the subprimes — then government is accountable to repair the damage. The job of libertarians — instead of endlessly pounding our chests and pissing up ropes … is to show taxpayers how and why they are being exposed to threats upon their security … and how politicians in both parties bury the evidence.

      But bellowing memorized slogans is so much easier!

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