Tuesday, 2 July 2013

Central banks and the markets: Free markets?

By Buttonwood (The Economist, 19th June 2013)

THERE is no doubt about the big news of the day; the market is waiting to see what the Federal Reserve says about the future pace of quantitative easing. Tapering has gone from being defined on Wikipedia as "the practice of reducing exercise in the days just before an important competition" to the stuff of nightmares for equity bulls.

Never mind the economic data which matters only in determining when, or how fast, the Fed indulges in tapering. Never mind the profits numbers either. Stockmarket analysts are like Kremlinologists analysing the appearance of grey apparatchiks at the Mayday parade. Will the ECB start QE? How effective will the Bank of Japan's programme be? Will Mark Carney change the direction of policy at the Bank of England? The assumption seems to be that stockmarkets will tumble without continuing central bank support.

All this follows a period ten years ago when it seemed central bank orthodoxy was that markets were a reliable measure of true values. Alan Greenspan was the champion of this line but he also said that
I don't know where the stock market is going, but I will say this, that if it continues higher, this will do more to stimulate the economy than anything we've been talking about today or anything anybody else was talking about.
That statement sums it up really. Up markets good, down markets bad. And when markets fell, central banks duly stepped in to cut rates. This did not always work, but over the long run we saw lots more bubbles than we did before.

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