As The Dow Jones Industrial Average Reaches 30,000, ‘The Fed Did It’ Narrative Becomes Even More Ridiculous
There are so many reasons the Federal Reserve will never be abolished, but none of them have anything to do with its existence being necessary. As this column has made plain for years, the central bank is wholly superfluous.
It began as a lender of last resort in 1913 to solvent banks, but it’s never fulfilled that role. With good reason. If you’re a financial institution with quality assets, you don’t need the Fed to help you through near-term cash crunches. Private lenders line up to liquefy that which is well run.
The Fed regulates banks. Ok, and what’s the point there? The same central bank has bailed out Citi how many times? At least five by the count of those in the know. It’s just a reminder of the obvious: the Fed’s regulators can’t see around the corner in order to detect trouble spots ahead of time for the banks they oversee. If they could, they wouldn’t be Fed regulators. They would be stunningly rich investors. In short, the Fed’s regulatory oversight is ineffective, but also duplicative. Banks would be heavily regulated with or without the Fed, to no good end.
The Fed aims to influence the short rate for credit? Oh please.
The Fed exists to buy government debt. Sure, but that’s government buying from government, which means it’s a wash.
As always, imagine if the Fed didn’t exist. All of the above functions would likely still be federal functions to the detriment of the U.S. banking system and the U.S. economy more broadly. Hard as it is for Fed supporters and critics to grasp, there’s no real “there” to the central bank. It’s just evidence that Congress outsources some of its bureaucratic excess. To rant about the Fed isn’t just to vastly overstate its economic influence, it’s also to reveal an impressive amount of naivete. The Fed is Congress. That’s it.
And no, it doesn’t move markets. Wealth extracted from the private sector and that is utilized by the Fed can influence markets to a degree. The Fed’s swagger is not its own.
Hence, to pretend our central bank can stimulate economic growth or engineer happy times of the economic kind is as lamebrained a belief as the one that says Congress can stimulate economic growth by extracting wealth created in the private sector, only to redistribute it to favored constituents. In truth, the politicized allocation of private wealth (the true definition of government spending for those a bit slow on the uptake) logically saps economic vitality. So does the Fed with its market interventions. Let’s define the latter as “inserting politics into market functions.” Do you still think the Fed can engineer economic growth?
Considering the stock market, or market indices like the Dow Jones Industrial Average, they’re just measures of market health arrived at through an index (in the DJIA’s case, 30 companies), and meant to provide investors with a broad snapshot of the market’s direction. Broad is achieved via a collection of companies from all walks of economic life. And as the title of this write-up indicates, the DJIA hit another record last Wednesday when the Index reached 30,000.
The number is kind of arbitrary, but journalists like milestones. Dow 30,000. It has symbolic meaning, but little individual meaning.
Indeed, while Apple’s AAPL shares rose 278% in between Dow 20,000 and Dow 30,000, and those same shares accounted for 2,500 Dow points in the rise from 20K to 30K, IBM’s IBM fell 30% during the time in question, Chevron’s CVX declined 18%, and Walgreen’s WBA 5.7%. Just as an “economy” is nothing more than a collection of individuals of varying talents, intelligence and commercial ability, so is a stock market. In a free economy there’s thankfully nothing equal about the individuals (Bill Gates thankfully doesn’t cook for us, and Shake Shack SHAK mogul Danny Meyer thankfully doesn’t presume to design our software) who comprise it, and just the same there’s nothing equal about companies. In August, longtime DJIA giant ExxonMobil XOM was deleted from the index after an ugly decline in its shares over the years at a time when Apple’s were surging. Equity markets aren’t uniform.
In reality, a stock’s value is a market speculation on all the dollar’s a specific company will earn over its existence. The view in November 2020 is that Apple’s future is bright, but Chevron’s isn’t.
Yet despite stocks existing as a look into the future from investors, economic and political pundits who perhaps should know better continue to promote the fiction that stock markets are a rigged game. Supposedly market exuberance is a consequence of the Fed. It’s hard not to laugh while typing this, but allegedly serious sources of opinion claim market exhilaration these last ten years has been a consequence of Fed meddling. Supposedly the central bank’s targeting of “low interest rates” has tricked investors, as have Fed purchases of mortgage and Treasury bonds.
Implicit in what’s always been absurd is that markets are so shallow and dense that they’d be tricked by attempted artificiality in the cost of credit. More ridiculous, the claim has long been that the Fed’s efforts to push down long Treasury rates in concert with efforts to prop up housing consumption have similarly cheered investors. On its own such thinking doesn’t stand up to basic scrutiny, after which the Fed is yet again nothing more than a creation of Congress. Translated, its dopey attempts at stimulation are just market interventions that Congress outsourced. There’s quite simply nothing to the laugh line that Fed machinations have had anything to do with market buoyancy these last ten, five or three years. To believe otherwise is to believe that the 20th century, when central planning failed in murderous, impoverishing fashion, was all a mirage.
After that, just look at the Dow Jones Industrial Average. If its surge had been rigged, there would have been a uniformity to the rise of company valuations in the Index. Except that there wasn’t. Goldman Sachs GS , a company that some refer to as “Government Sachs” owing to the strong ties between its executives and the federal government, has been flat since Dow 20K. On the other hand Microsoft MSFT , a company once mauled by the federal government, has returned 236% since Dow 20K.
In short, markets work. They reflect reality. Not only is “the Fed did it” an insult to American ingenuity on par with Barack Obama’s “you didn’t build that,” such a stance ignores the basic truth that if U.S. stock markets were rigged by the Fed, they would be too depressed to be worth rigging.
John Tamny is a Forbes contributor, Director of the Center for Economic Freedom at FreedomWorks, editor of RealClearMarkets, and a senior economic adviser to Toreador Research & Trading. He’s the author of “Who Needs the Fed?” (Encounter 2016), along with “Popular Economics” (Regnery, 2015).
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