This is what happens in a centrally planned economy. When people learn that the market is rigged, they leave the market.
One of the reasons that Uncle Ben is flooding the market with printed money is to reduce volatility in the stock market. Volatility can lead to a panic, and a panic would be disastrous in our weakened economic state.
People have adjusted to the existence of the Bernanke Put. Short-sellers, put purchasers and other bears have been burned so many times in the last two years by market-distorting liquidity injections. In response, they have left the building. Bears are useful, because they add liquidity to the market by standing willing to sell securities. This liquidity has been crowded out by the Fed’s action.
Investing has nothing to do with fundamentals anymore. All investors are attempting to front-run the Fed’s next rounding of money printing, and they have bid up the asset markets to near record highs. Expensive markets are risky markets, so paradoxically the Fed has actually increased systemic risk.
If the markets were still functioning and not dysfunctioning, short-sellers would have stepped in and provided the necessary selling pressure that would have tamped down the exuberance of the markets. This is no longer happening, and we are all the worse off for it.
While Uncle Ben thinks that he has pulled off quite the coup by purging volatility from the system, he has actually guaranteed the next crisis, which will make the GFC look like a correction. Retail investors want no part of this and have been leaving the stock market slowly but surely over the past few years. Mutual fund outflows and declining ETF trading show that this trend has not abated.
This whole scenario is actually playing out like a Greek tragedy. Our protagonist is attempting to avoid fate, but the very actions he takes make this fate more likely and more catastrophic.
Bernanke is a student of the Great Depression. Bernanke is what is known as a “reflationist.” With 20/20 hindsight, reflationists believe that had the Federal Reserve of the 1930’s merely loosened monetary policy, the whole depression could have been avoided.
Reflationists are merely another version of interventionists that have taken over the intellectual mainstream. As such, all they believe in is intervention. The United States substantially eased monetary policy throughout the 30’s by running large budget deficits and devaluing the dollar.
A common interventionist trope is that if the intervention fails, then it wasn’t large enough. This is the road that Bernanke is leading us down. He believes that the problem with the monetary easing during the depression was that there was not enough of it, and now the only thing wrong with QE1, QE2 or Operation Twist was that we needed to more of it.
When you believe something for your entire adult life, writing papers, making speeches and teaching students these ideas, then it is way too late to change your mind at 58 years old. He keeps throwing money, our tax payer money, at our economic problems by purchasing assets from the banks and offering these same banks cheap financing. All the while, he never stops to consider that his actions are part of the problem.
Ultimately, the taxpayer is the one bearing the present costs of these dangerous policies. High gas prices are one effect of money printing. Another are these low trading volumes.
The taxpayer will also bear the costs of these policies after the next market crash. All of those securities on the books of the Fed will plunge in value creating a massive loss and unleashing the pent-up instability of the past few years.
Don’t worry about Uncle Ben. He’ll be fine. These cheap loans and asset purchases have guaranteed him a cushy job in one of the banks he subsidizes. It is the rest of us who will be cleaning up this mess for a generation.