Janet Yellen told CNBC Monday that Congress should consider allowing the Fed to buy stocks. That would be the end of capitalism in America.
Former Fed Chair Janet Yellen says Congress should consider allowing the Federal Reserve to buy stocks. She said that, while it’s not necessary, it might be a good idea:
It would be a substantial change to give the Federal Reserve the ability to buy stock. I frankly don’t think it’s necessary at this point. I think intervention to support the credit markets is more important, but longer term it wouldn’t be a bad thing for Congress to reconsider the powers that the Fed has with respect to assets it can own.
The Fed is currently only allowed to acquire U.S. Treasuries and bonds with government backing. But in response to the current financial crisis the Fed has moved to acquire corporate debt through exchange-traded funds.
It would be a radical change for the Federal Reserve to start buying stocks in publicly traded corporations. In fact it would be the end of capitalism as we know it.
If the Fed started buying stocks, it would be tantamount to the central bank picking winners and losers. That’s what it’s already doing with corporate bonds.
Part of its move into corporate debt is through exchange-traded funds with broad exposure to investment grade corporate bonds. But the Fed is also going to load bonds directly issued by investment grade U.S. companies.
That will be tantamount to an unaccountable, un-elected monetary bureaucracy directly picking which corporations’ bonds to boost. If it invest in stocks the same way, the Fed will be centrally planning the economy through such narrow interventions in capital markets.
This is anathema to the free market system, which aggregates the choices of innumerable individual actors into stock prices. Nobel Prize-winning economist Friedrich Hayek argued the free market makes capital markets more efficient and productive.
That’s because the information required to price assets is distributed across the many individual actors, not held by a few central planners. Economists call it “The Local Knowledge Problem.”
The Fed already holds a staggering amount of power. The U.S. economy is mostly capitalistic, but its financial system is socialist.
Money is issued by a single, central authority. Rather than allowing markets to determine interest rates– the price of lending– central planners do.
Has it worked out well for the American economy?
The Federal Reserve’s twin mandates are stabilizing the value of the dollar and maximizing employment. But its unchecked power to expand the money supply fuels reckless booms and devastating busts.
Credit expansion under the Fed’s artificially low interest rates fueled the last financial crisis in 2008. The Fed incentivizes banks to lend money at rates they normally wouldn’t in a free market. That causes reckless debt-fueled spending sprees.
When the Fed does this, it picks a broad group of winners and losers. It rewards borrowers with artificially low rates, and punishes savers.
That’s bad enough in theory and practice.
But directly picking corporations to buy their stocks sounds like something right out of Karl Marx’s wildest dreams.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.