So the markets are tanking. People are declaring “the end of fiscal policy” and demanding more forceful measures to combat the looming recession than rate cuts and quantitative easing. Namely, I am seeing floated the idea that the Fed buy up stocks to stop the crash.
Now, if the central government were buying up stocks, we might call that socialism since it would mean the government taking an ownership stake in businesses. But the Fed is an independent bank as I understand it, albeit one that can essentially print unlimited amounts of money. Therefore it could buy stocks until they reached whatever price level they chose, taking an ownership stake in companies in the process.
But that’s an independent, money-printing bank doing this. It wouldn’t be socialsim. What is that?
For the Fed to buy stocks, Congress would have to make changes to the Federal Reserve Act. Monetary policy isn’t a great tool to deal with the current situation because they’d be “pushing on a string“ as they say. This situation requires fiscal policies (and monetary to deal with a liquidity crisis) that outright create demand. So far, any central bank that has purchased equities has done so ostensibly to “diversify” reserves away from the low rates created by their own QE. The Fed would lose a good deal of credibility if it made a decision to buy stocks now. Plus the wealth effect is an indirect method to stimulate the economy whereas fiscal is direct. There would have to be a new term created for stimulative stock purchase program. I suggest DUMB (Devaluation Utilizing Market Buys).
Given what happened in 2008, it may likely play out like this:
The government gives out huge loans (trillions of dollars) at negligible if not free interest to banks, stock brokerages, etc. (who are now often one and the same) to buy up stocks.
These companies in turn buy up government notes* with that money instead of stocks since the stocks are going to continue to go down while the notes will return a (small) guaranteed interest over the interest they have to pay back.
The US taxpayer ends up paying that difference in interest which has no direct effect on the economy whatsoever.
The government has to sell off a ton of notes to finance these loans. And, hey, someone has to take them of its hands.
That was preferred stock and was intended to recapitalize the banks to help with liquidity issues rather than prop up the market for the securities. What the OP is referring to is a whole different fucked up ball game.
Thought I would bump this thread since the talk of the Fed buying stocks to prop up the market is heating up. The linked article does not say what one would call such a move, besides things like “creative”.
It doesn’t quite seem like “nationalization” since the plan is to buy ETFs rather than seize companies whole. But what is it? If I don’t get a better answer, I am going to stick with D.U.M.B from upthread
If the government is taking a stake in a company to keep it from going bust, then that’s a bailout equity exchange. The government is either assuming or guaranteeing the company’s debt in exchange for a share of the company.
What the OP seems to be asking about is the government buying stocks on the open market in order to boost share prices. I’d call that a demand side intervention. I suppose if you’d like to turn it into an acronym, you could go with SEDSI - Stock Exchange Demand Side Intervention, but I’m making that acronym up.
I question the wisdom of that type of market intervention. It would provide a temporary artificial boost to prices, but do nothing to change the fundamental worth of the companies. If an airline is going bankrupt, buying its stock isn’t going to stop it from going bankrupt. Government intervention in the stock market would help the stock owners by allowing them to sell their shares at a better price. But that just means that the government is assuming the market risk instead of the shareholders. I think case-by-case direct intervention would be more effective than market based intervention.
