Like the drug counselor who has a secret habit, the industry’s actions give Wall Street away. And investors only need to look at the day-to-day fluctuations in the market when a possible change in Federal Reserve policy is hinted at. Just Monday, the Fed’s use of a single word, “taper,” in relation to its bond-buying program created a surge in media coverage and shakiness in the markets.
Wall Street is addicted to cheap money.
Since the Fed, under Ben Bernanke, announced its $85-billion-a-month bond-buying program in September 2012, the stock market has been on an absolute tear. The Dow Jones Industrial Average, the S&P 500 Index and the Nasdaq Composite Index are up between 9% and 13%. Those returns would make a great year. But that’s in less than eight months.
Since it essentially dropped overnight interest rates to zero in 2008, the Fed has tripled its balance sheet to $3.3 billion. Critics see the cash influx into the economy as “money printing” (which it is) and they fear the move will devalue the dollar and, in turn, the wealth of the nation and its citizens (it hasn’t yet).
Meanwhile, Wall Street and in the investing community — remember they disavow any sort of intervention — have had the opposite reaction. The feeling is the Fed’s backdoor stimulus has fueled or is fueling an economic recovery (it’s not).
This isn’t rocket science, nor is it anything new. Even in good economic times, Fed interest-rate policy is closely watched. It sets the trading agenda. And we all know that low-rate policies under previous Fed Chairman Alan Greenspan set the table for a bubble in real estate and other credit assets from which we are still digging out today.
But it’s one thing to appreciate and embrace the Federal Reserve as an economic wellspring, another to castigate it as an overbearing and constricting force. Yet, that’s exactly what Wall Street does. It rails against any form of central authority, but lusts after its largesse — either economic stimulus or bailouts.
And that last part is what really deserves attention. In 2011, the government commissioned the first audit of the Federal Reserve. The idea was to measure how much the central bank had extended to the so-called private financial sector to keep it solvent and running.
The finding: $16 trillion in guarantees and cash injected into the system, more than the U.S. annual gross domestic product. As money center banks — fueled by the toxic securities of investment banks — neared collapse, the central bank used extraordinary measures to shore it up. The move put taxpayers at significant risk. For if confidence in the Fed eroded or its measures didn’t work, ultimately the economy would have collapsed into mayhem.
It’s because of this intervention the term “too big to fail” has become part of the national lexicon.
So-called private banks are really extensions of the government, not the sort of free-rolling capitalism its leaders espouse.
None of this is to say that Fed policy is never to be questioned. Far from it. As mentioned, the Fed’s interest rate policies, along with Washington’s tax incentives for home ownership, created the economic bubble.
Ultimately, however, Wall Street has seen an equal amount of good. Its rallies have been built on Fed moves. An active Federal Reserve has always been considered good for stock market investors. Its interest rate moves can also fuel the bond markets or blow them up, as many fear is happening now.
That’s why Wall Street needs to recognize that for all of its criticism of Fed policy and regulation, the industry receives far more than it gives. A good first step would be for banks and brokerage leaders to acknowledge that they’re beneficiaries of the system, not victims.
In other words, as in any recovery program, admitting you have a problem is the first step.
[from MARKETWATCH commentary by David Weidner]
As always, posted for your edification and enlightenment by
NORM ‘n’ AL, Minneapolis