Free Markets: May They Rest In Peace

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For more than two centuries, Americans have pointed with great pride to this country as a bastion of democratic free markets. Many have looked with antipathy at European economies tinged with socialism and with disdain at the centrally planned economies of communist countries. Whether out of convenience or desperation, we have recently come to welcome central planning.

In pursuit of its dual mandate of a stable currency and maximum employment, the Fed has apparently decided that it simply cannot allow even a garden-variety recession–possibly ever. With the Fed balance sheet and total domestic debt at levels inconceivable just a few years ago, it is hard to imagine a scenario in which a recession would not lead to dangerous debt defaults.

This week’s Federal Open Market Committee meeting produced a statement designed to be all things to all people. Language from earlier statements was eliminated, and Fed Chair Janet Yellen stressed that future action on interest rates would be “data dependent.” Those words, however, have now become meaningless, because prior data hurdles that were to be triggers for interest rate rises have all been abandoned when reached. This Fed has clearly painted itself into a corner. They hate to leave interest rates at the zero bound, because they have no ammunition left to counter future problems. At the same time, they are deathly afraid to raise rates because the economy remains in its weakest recovery since World War II. Celebrating the continuing medicine of easy money rather than fearing the underlying disease necessitating it, Wall Street partied on, the Dow Jones Industrial Average rising 400 points intraday from just before the FOMC announcement to just after.

Because the Fed continues to accede to Wall Street’s wishes, there are few complaints from the financial community about the erosion of free market principles and the progressive evolution toward central planning. Should the Fed’s experimental monetary policies fail to keep stock prices buoyant, however, stones will inevitably be cast. There will logically be questions asked about how the country could have allowed its economy to be controlled by a group of academics and regulators, virtually unsullied by any real world business experience.

This week’s violent anti-European Central Bank protests in Frankfurt, Germany bring to mind other potential problems. Our central bank has been an integral force in creating an environment in which the economically privileged have prospered mightily from Fed-sponsored stock and bond market progress, while little benefit has filtered down to the broader economy. Should that disparity continue or worsen, it’s not unrealistic to imagine large protests born out of economic frustration in this country as well.

I have long opposed the Fed’s zero interest rate policy and the massive expansion of its balance sheet. With an admitted objective of pushing stock prices higher for a positive wealth effect, the Fed, I suspect, has also succumbed to the temptation to support stock prices with strategic buying, almost certainly through surrogates. Since the market bottom in 2009, buying has mysteriously appeared at points from which price breakdowns would normally have proceeded in decades past. Should the Fed eventually be found to have surreptitiously supported stocks as part of their central planning and control, I hope they will be properly punished. And if Main Street protestors become sufficiently incensed, they may seek to identify those who unjustly rewarded Wall Street insiders.

As one firmly committed to non-violence, I regret seeing public protest turn violent. However, I would welcome comprehensive investigations and appropriate prosecutions of anyone who distorted free and honest securities markets–up to and including Fed officials. If individuals can be prosecuted for distorting market prices, so should those wielding far greater power. And if regulators really wanted to reestablish free markets, they could and should go after large trading desks that paint the tape in one direction to create an environment in which they can establish their intended larger position for a move in the opposite direction. Distorted markets will continue until the clamor is loud enough to make them free and honest. A welcome first step would be for the Fed to abandon its direct interference and to back away from its artificial experimental monetary policy.