Central Banks Buying Public Stocks Is a Really Bad Idea

Janet Yellen runs the Federal Reserve.  She is a central banker.  She said that the Federal Reserve is looking at using money outside of normal monetary machinations.  They are looking at going into the stock market and buying public equity.

I cannot stress enough the moral hazard and bad economic incentives an action like that would create.

It’s no secret that US GDP is anemic.  It’s been anemic the entire Obama presidency.  It’s not the fall out from the financial crisis at this point.  It’s the fallout from really, really bad public policy decisions.  Public policy and the regulatory state that has been set up has created totally perverse economic incentives that have driven the US economy to a halt despite having 0% interest rates.

Here is a recent example of really stupid public action. The Obama administration attacked DeutschBorse. They are bullying them and other banks into monetary settlements.  Once that rumor hit the street, an already weak DB was faced with a bank run. DB is important to the banking system because of it’s huge derivatives book. It’s a key cog in the machine.

Imagine what could happen if a central bank bought public equity.  Imagine the political favoritism. Remember when the Obama administration lost $500M investing in a solar energy company? Imagine the fallout if things went bad for a public company with the implicit backing of the government.  If you were paying attention in 2008, you already have.  The companies are Fannie Mae ($FNMA) and Freddie Mac ($FMCC).  They have never recovered, and neither have taxpayers.

FNMA data by YCharts

You hate to say, “The stock market is rigged”.  I have been hearing that from different people in different places my whole life since the 1987 crash.  But, with all the monkey business being played by central banks world wide these days, it’s getting harder and harder to think there isn’t something funny going on.

Having a central bank invest in public markets is not capitalism.   Companies fail.  That’s healthy if they fail because of business reasons.  When companies fail because the government ran them out of business, it’s not a good thing.  Central banks entering a public equity market and becoming a shareholder of a public firm would be an tremendous expansion of government interference into our lives.  Having the government as a voting shareholder of a company means they can influence who gets elected to the Board of Directors.

The overt attacks on capitalistic enterprises by regulators, elected government officials and agencies isn’t making the economy more “fair”.  It’s not making it work better.  It’s not keeping any company from “harming” innocent citizens.  It is expanding the role of government, and killing our economy.

My friend Rick Santelli commented on Janet Yellen’s thoughts as only he can.