Back in June I said that rather than targeting interest rates, which are now at zero, the Fed should target stock prices and buy S&P futures. That would be a very direct transmission mechanism to the real economy as it would boost firm capital and it would have a positive wealth effect for households, which hold about as much stock as real estate. It would also fund underfunded pensions.
Well, some are catching on to my idea! Money manager, James Altucher said this:
| The Fed should regularly buy S&P 500 futures before the open, at midday and near the close, when it'll get the most bang for its buck, Altucher says. "They've been spending a $1 trillion [plus] in the mortgage market," he notes. "Now I'm saying, spend 1% in the stock market. It's the same idea. Let's do it where it impacts people the most - where it impacts Main Street." |
Gee, he must be reading this blog!
4 comments:
By what mechanism does the removal of real assets (stocks) from one sector (households) by another sector (government) in exchange for claims against the sectors (dollars) constitute a positive wealth effect?
If lack of demand within a sector is the issue, can we not increase that demand without depriving that sector of its real assets?
Mike,
Here's a fairly nicely fleshed out argument for the Fed buying stocks:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/03/is-quantitative-easing-trying-to-flatten-or-steepen-the-yield-curve.html
I just happened upon this today.
Nice article, Mike!
Kris,
Stocks are financial assets, but whatever.
Your point is well taken. There is no guarantee that rising stock prices will cause a concommitant rise in demand, however, there is some empirical evidence to suggest that it could. For example, when home prices rise (the other major household asset) we've seen a rise in demand. We also saw, through the second half of the 1990s, a very significant boost in demand occured. I just think it would be a more effective policy than ZIRP at this point.
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