Courtesy of Mish.
In efforts to spur lending and increase the rate of inflation, central banks in the US, EU, and Japan have engaged in dubious tactics.
Every time their actions fail, they double down in failed strategies.
The Bank of Japan and ECB are now running out of bonds to buy. To circumvent the imagined problem, the former is already buying equities. Will the ECB follow? Does it even matter?
Let’s address those questions with an eye on social mood.
The Wall Street Journal writers Brian Blackstone and Tom Fairless ask Could the ECB Start Buying Stocks?
By failing to properly analyze social mood, they come to the wrong conclusions.
Some central banks already invest in equities. Switzerland’s central bank has accumulated over $100 billion worth of stocks, including large holdings in blue-chip U.S. companies such as Apple and Coca-Cola.
If the ECB decides to raise its stimulus by extending its current bond program, as many analysts expect, fresh questions will be raised about how it will continue to find enough bonds to buy. The bank is already purchasing €80 billion ($89.2 billion) a month of corporate and public-sector bonds to reduce interest rates across the eurozone. Its holdings of public-sector debt reached €1 trillion last week, the ECB said Monday.
With a key policy rate already below zero, ECB officials hope that buying bonds with freshly printed euros will reduce interest rates further. But policy makers face a practical constraint: The ECB is running up against self-imposed limits on how much of a country’s bonds it can hold.
“The obvious reason for the ECB to buy equities is they have almost run out of German bonds to buy,” said Stefan Gerlach, chief economist at BSI Bank and a former deputy governor of Ireland’s central bank. “The basic idea is that the central bank can put essentially anything on its balance sheet and there is no reason to be straight-laced about this.”
When policy rates approached zero, central banks in the U.S., the U.K., Japan and the eurozone turned to bond purchases to reduce long-term interest rates. Buying equities would likely yield some of the same effects in terms of encouraging consumption and investment through higher household wealth and lower cost of capital.
“I don’t see a reason not to do this,” said Joseph Gagnon, senior fellow at the Peterson Institute for International Economics. “It isn’t obvious to me why a central bank wouldn’t always want a diversified portfolio, including equities.”
Straight Laced
Indeed, central banks can put anything on their balance sheet. But there is no reason to be straight-laced about how counterproductive the concept is.
