Stimulus spurs stocks to rise, then slide
The multitrillion-dollar financial infusion ignited by the Federal Reserve and the European Central Bank last month created an explosion of confidence in stock and bond markets. As the dust settled last week, investors' renewed feeling of security gave way to anxiety.
Should pessimism spread, it will threaten the portfolios of market bulls and bears.
In the face of falling economic growth rates and high unemployment in the United States and other trade-linked key economies, such as the European Union, Goldman Sachs estimated that the Fed's new economic stimulus program, called QE3 — a third round of so-called quantitative easing — will reach $2 trillion. This is because more and more printed money will be necessary to lift confidence.
Adam Parker, Morgan Stanley's chief equity strategist, speculated that “the Fed [may] dramatically augment this program.” In other words, a QE4 now appears in the cards.
Stephen Jen, a hedge fund manager and a former Morgan Stanley foreign exchange expert, told The Financial Times that central banks “know everything except their own limitations.”
Such views expressed by top Wall Street executives are deeply concerning, especially as it becomes increasingly clear that past stimulus efforts are not working.
Banks are left with huge amounts of bad loans on their books. Bank regulators have allowed these loans to remain on the books as “performing” loans. However, even the banks realize the inherent credit unworthiness of these ‘toxic' loans. Banks, therefore, are willing to lend only on stringent terms against excellent credit.
In addition, regulators continue to allow banks and mortgage companies to hold toxic mortgages left on their books from the financial crisis.
In short, despite the injection of trillions of dollars, huge amounts of toxic loans and mortgages lie hidden within major financial institutions.
Recent stock market rallies have been followed by declines. This demonstrates a lack of sustainable investor confidence that central banks have the ability to fight mega economic trends. There is a growing perception that central banks are risking more than they can deliver.
Such uncertainty is cause for concern. The economies and financial markets of key nations are underpinned by a seemingly implacable faith in their central banks.
Historically, central banks engendered faith in their role as lenders of last resort. Today, their role has been expanded greatly to include market support, protection of the banking industry and even to act as an engine of economic growth.
There are two old and long honored Wall Street maxims: “Don't fight the Fed” and “The trend is your friend.” Today, the Fed appears to be fighting the trend. This raises serious questions about the Fed's likely success.
To a large extent, the American economy has become political. As such, far greater financial market volatility can be expected.
For the first time in generations, investors face the strategic challenge of investing not just in volatile markets. If central bank credibility falters seriously, there is a real risk of catastrophic price collapse in financial markets.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at firstname.lastname@example.org
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Big plays cost Steelers defense in preseason loss at Bills
- Steelers notebook: Tomlin mum on Bryant suspension
- Pitt star running back Conner remains grounded despite success
- Rossi: Beleaguered Steelers need MVP from Big Ben
- Happ’s strong start, Ramirez’s homer pace Pirates past Rockies
- Pirates notebook: Hurdle’s faith in Polanco pays off
- Architecture: Pittsburgh history in 10 houses
- QB Vick hits ground running in debut
- Port Authority’s plan for car-free communities slow to bear fruit
- Patience serves as virtue amid pitching prospect Glasnow’s quest for majors
- Pitt’s cancer institute marks 30 years with eye toward future