Central Banks Have Become A Corrupting Force — Paul Craig Roberts and Dave Kranzler
Central Banks Have Become A Corrupting Force
Paul Craig Roberts and Dave Kranzler
Are
we witnessing the corruption of central banks? Are we observing the
money-creating powers of central banks being used to drive up prices in
the stock market for the benefit of the mega-rich?
These
questions came to mind when we learned that the central bank of
Switzerland, the Swiss National Bank, purchased 3,300,000 shares of
Apple stock in the first quarter of this year, adding 500,000 shares in
the second quarter. Smart money would have been selling, not buying.
It
turns out that the Swiss central bank, in addition to its Apple stock,
holds very large equity positions, ranging from $250,000,000 to
$637,000,000, in numerous US corporations — Exxon Mobil, Microsoft,
Google, Johnson & Johnson, General Electric, Procter & Gamble,
Verizon, AT&T, Pfizer, Chevron, Merck, Facebook, Pepsico, Coca Cola,
Disney, Valeant, IBM, Gilead, Amazon.
Among
this list of the Swiss central bank’s holdings are stocks which are
responsible for more than 100% of the year-to-date rise in the S&P
500 prior to the latest sell-off.
What is going on here?
The
purpose of central banks was to serve as a “lender of last resort” to
commercial banks faced with a run on the bank by depositors demanding
cash withdrawals of their deposits.
Banks
would call in loans in an effort to raise cash to pay off depositors.
Businesses would fail, and the banks would fail from their inability to
pay depositors their money on demand.
As
time passed, this rationale for a central bank was made redundant by
government deposit insurance for bank depositors, and central banks
found additional functions for their existence. The Federal Reserve, for
example, under the Humphrey-Hawkins Act, is responsible for maintaining
full employment and low inflation. By the time this legislation was
passed, the worsening “Phillips Curve tradeoffs” between inflation and
employment had made the goals inconsistent. The result was the
introduction by the Reagan administration of the supply-side economic
policy that cured the simultaneously rising inflation and unemployment.
Neither
the Federal Reserve’s charter nor the Humphrey-Hawkins Act says that
the Federal Reserve is supposed to stabilize the stock market by
purchasing stocks. The Federal Reserve is supposed to buy and sell bonds
in open market operations in order to encourage employment with lower
interest rates or to restrict inflation with higher interest rates.
If
central banks purchase stocks in order to support equity prices, what
is the point of having a stock market? The central bank’s ability to
create money to support stock prices negates the price discovery
function of the stock market.
The
problem with central banks is that humans are fallible, including the
chairman of the Federal Reserve Board and all the board members and
staff. Nobel prize-winner Milton Friedman and Anna Schwartz established
that the Great Depression was the consequence of the failure of the
Federal Reserve to expand monetary policy sufficiently to offset the
restriction of the money supply due to bank failure. When a bank failed
in the pre-deposit insurance era, the money supply would shrink by the
amount of the bank’s deposits. During the Great Depression, thousands of
banks failed, wiping out the purchasing power of millions of Americans
and the credit creating power of thousands of banks.
The
Fed is prohibited from buying equities by the Federal Reserve Act. But
an amendment in 2010 – Section 13(3) – was enacted to permit the Fed to
buy AIG’s insolvent Maiden Lane assets. This amendment also created a
loophole which enables the Fed to lend money to entities that can use
the funds to buy stocks. Thus, the Swiss central bank could be operating
as an agent of the Federal Reserve.
If
central banks cannot properly conduct monetary policy, how can they
conduct an equity policy? Some astute observers believe that the Swiss
National Bank is acting as an agent for the Federal Reserve and
purchases large blocs of US equities at critical times to arrest stock
market declines that would puncture the propagandized belief that all is
fine here in the US economy.
We
know that the US government has a “plunge protection team” consisting
of the US Treasury and Federal Reserve. The purpose of this team is to
prevent unwanted stock market crashes.
Is the stock market decline of August 20-21 welcome or unwelcome?
At
this point we do not know. In order to keep the dollar up, the basis of
US power, the Federal Reserve has promised to raise interest rates, but
always in the future. The latest future is next month. The belief that a
hike in interest rates is in the cards keeps the US dollar from losing
exchange value in relation to other currencies, thus preventing a flight
from the dollar that would reduce the Uni-power to Third World status.
The
Federal Reserve can say that the stock market decline indicates that
the recovery is in doubt and requires more stimulus. The prospect of
more liquidity could drive the stock market back up. As asset bubbles
are in the way of the Fed’s policy, a decline in stock prices removes
the equity market bubble and enables the Fed to print more money and
start the process up again.
On
the other hand, the stock market decline last Thursday and Friday could
indicate that the players in the market have comprehended that the
stock market is an artificially inflated bubble that has no real basis.
Once the psychology is destroyed, flight sets in.
If
flight turns out to be the case, it will be interesting to see if
central bank liquidity and purchases of stocks can stop the rout.
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