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Who hates low interest rates? Investors, along with people who live on their savings. There is no place where you can get a return without taking unjustified risks. And risk is misjudged everywhere. For years, investors have been pushing into the stock market because their assessment of the risk-reward ratio makes more sense there than on the bond market. This trade paid off, at least at the beginning of the QE experiment.
But now the stock market is also at all-time highs. What should investors do at a time when the Fed has manipulated interest rates to their lowest level with no sign or willingness to change course? It’s no wonder it’s in meme stocks like Game Stop and AMC, in cryptocurrencies like Bitcoin and Dogecoin, in the bizarre phenomenon of non-fungible tokens, and in the insane story of the $ 113 million deli in Paulsboro, NJ, Many manias exist: Safer – Places where investors can get the oversized returns they desire.
Speaking to the Economic Club of New York, Lawrence Summers, a former Treasury Secretary, and Glenn Hubbard, a former chairman of the Council of Economic Advisers, expressed concern. Mr Summers, who served on the Democratic presidency, has repeatedly expressed concern that the combination of current monetary and fiscal policies will fuel undesirable inflation – a concern confirmed by this month’s consumer price index report. “Future financial historians will be puzzled as to why we spent $ 50 billion a month buying mortgage-backed securities in the face of skyrocketing house prices,” he said. Hubbard, a former Republican official, said he saw no “argument” for the Fed’s current approach “without telling the public what an exit path will be.”
So far, this exit path has not materialized. When asked in March whether the Fed is “talking” about ending QE, Powell said “not yet”. The next month he repeated that the time had not yet come. That sounds like a man under pressure to maintain the status quo.
Of course, there is a counter-argument: that worries about wild inflation are exaggerated and that it will take time to rebalance supply and demand equations after much of the global economy has been idle for more than a year. But that’s no reason to expand the QE program again.
At some point, the years of abundance in financial markets are likely to lead to a volcanic economic disruption. The capital markets will collapse, debt and equity financing will largely fail to materialize. Years of economic pain and turmoil will follow, with the worst, as always, borne by those least able to deal with the aftermath. Just like after 2008, the guilt will be diffuse.
But there are alternatives. Brian Deese, director of the National Economic Council, should encourage President Biden to urge Mr Powell to curb the Fed’s bond-buying program and continue to do so after the market tantrum. Ron Wyden, chairman of the Senate Finance Committee, might invite survivors of the 2008 financial crisis to remind us how close we were all to the precipice last time around. The Fed could make the decision to change the direction of quantitative easing at meetings of the Federal Open Market Committee this week.
If not, we scratch our heads in collective astonishment that we are again in the middle of a financial crisis – one that can be avoided.
William Cohan, a former investment banker, is a founding partner of Puck, a new media platform, and the author of several books on Wall Street.
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