Monday, September 10, 2018

IMF late to the ballgame as central banks have been buying stocks for more than a decade

In a rather hilarious suggestion made on Sept. 10 by the former chief economist of the IMF, Olivier Blanchard wants the Fed to completely tear up their legal mandates and buy stocks to bolster the equity markets during the next recession.

The Federal Reserve buying stocks? How about financing the federal deficit? Or buying goods? 
These were some of the suggestions for combating the next severe recession given to the central bank by former IMF chief economist Olivier Blanchard at the Boston Fed’s monetary policy conference over the weekend. 
There is a general sense the Fed has to re-think its approach to combating recessions given the low-interest-rate environment that is persisting. - Marketwatch
What makes these suggestions humorous is the fact that the Fed, Bank of Japan, Bank of Switzerland, and many other central banks within Europe and Asia have already been buying stocks going back more than a decade.
One indication of just how messed up and flawed the global markets have become is reflected in the way central banks across the world are now buying stocks. This has become a part of their response to correcting the forces of past excesses. Their incursion into this bastion of the free markets signals we have entered the era where true price discovery no longer exists. The central banks are often viewed as price-insensitive buyers, so this incestuous influx of money is in some ways the ultimate distortion. This is especially true when the markets are not deep enough to accommodate the size of these purchases. Over the years, global currency reserves have grown and this has increased pressure on central-bank managers to diversify them, moving from being a liquidity manager to focusing on investment management but with this comes risk. 
recent article in the Wall Street Journal details the reason behind why central banks are buying stocks. There are several forces driving this. Part of it is a hunt for higher returns, because of negative rates, nearly $11 trillion or roughly one-quarter, of global fixed-income assets yielded below zero at the end of 2016, according to Bank of America Merrill Lynch. This means some are investing a bigger share of their growing foreign-exchange reserves in equities, corporate bonds, and other riskier assets while others are doing so merely to prop up their stock market in an effort to create a wealth effect, hoping it will cause consumers to feel better and go out and spend which will propel the economy forward.Seeking Alpha
The IMF has often been late to the ballgame on many things going on in the global economy and financial systems, and their place in the monetary system is quickly being usurped by nations and institutions that don't have an agenda of wanting to enslave populations under programs of debt and austerity.  And for anyone with a modicum of intelligence, how beneficial to the economy could having central banks buy stocks really be when all they do is print money out of thin air, and use that worthless fiat to buy real assets for the cost of simply clicking a button on a keyboard.

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