How the Federal Reserve May Try to Lift the Economy From the Next Recession

Of late it has been raising chirps about negative interest rates and permanent quantitative easing.

Why such talk in an allegedly strong economy?

Neither policy has proven effective… incidentally.

Now our agents inform us former chair Janet Yellen is out stumping for her former employer:

Said she, “Global central banks don’t have adequate crisis tools.”

What might these be?

In September 2016 she perhaps let the feline out of the bag. She suggested the Federal Reserve could help the economy if it were allowed to purchase stocks and

corporate bonds.

Central banks such as the Bank of Japan and the Swiss National Bank already purchase stocks.

But neither carries the heft of the Federal Reserve.

Here is analyst Jesse Colombo of Real Investment Guidance regarding that type of “help”:

If the Federal Reserve is ever allowed to buy stocks and corporate bonds, it will create an extremely dangerous situation in which investors, speculators and business leaders will feel that they can take virtually unlimited risk and will still be backed by the Fed. This phenomenon is known as a moral hazard… The Fed has already created an unprecedented moral hazard by stepping in to prop up the stock market every time it has tumbled in the past decade… If the Fed can buy stocks and corporate bonds, it will compound moral hazard on top of more moral hazard… The result will likely be a stock market bubble that is more extreme and dangerous than any other stock market bubble in history.

Just so.

MMT, bread, circuses, negative interest rates, eternal QE, the Federal Reserve speculating in stocks.

Some of it — or most of it — could be just one recession away.

Regards,

Brian Maher