Here Comes The Yellen Call Option – Podcast

Fed Chair Janet Yellen Hints the Fed Buying of Stock Would Be Useful Addition to the Fed’s ‘Tool Kit’.

Buying stocks solves the Fed’s problem of raising rates: If stocks fall because rates rise, the Fed can boost them back up by purchasing depressed shares.

Fed share buying would harm gold.

The Dollar as the World’s Reserve Currency Can’t Have Negative Rates.

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The Yellen Call Option

Yellen’s Jackson Hole Speech Sets the Stage

The Federal Reserve’s Monetary Policy Toolkit: Past, Present, and Future

On the monetary policy side, future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. For example, future policymakers may wish to explore the possibility of purchasing a broader range of assets. Beyond that, some observers have suggested raising the FOMC’s 2 percent inflation objective or implementing policy through alternative monetary policy frameworks, such as price-level or nominal GDP targeting. I should stress, however, that the FOMC is not actively considering these additional tools and policy frameworks, although they are important subjects for research.

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When asked on Capitol Hill, Yellen responded, coying with a ‘we are not asking’ type response.

Congressman:Is the United States Federal Reserve looking at the possibility of adding the purchase of equities to its tool box as it looks at monetary policy?”

Ms. Yellen “Well, the Federal Reserve is not permitted to purchase equities. We can only purchase U.S. treasuries and agency securities. I did mention in a speech in Jackson Hole, though, where I discussed longer term issues and difficulties we could have in providing adequate monetary policy. Accommodation may be somewhere in the future, down the line that this is the kind of thing that Congress might consider, but if you were to do so, it’s not something that the Federal Reserve is asking for.” (not saying I want to go on a date with you but if you asked I wouldnt say no)

The next day in video conference with bankers, Ms. Yellen said buying stocks while not pressing and prohibited by law, the Fed could help the economy in the next down turn. But because of the prohibition of buying corporate bonds and stocks, Ms. Yellen noted the Fed’s “tool box” may “reach the limits in terms of purchasing safe assets like longer-term government bonds.” “It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions – buying equities and corporate bonds could have costs and benefits.”

Seems the only thing stopping the Fed from taking the buying of stocks under consideration is the law prohibiting them from buying stocks.

Boosting Asset Prices Without Boosting Productivity or Profits

Boosting existing assets without any corresponding increase in productivity, is merely just changing the price unilaterlly without any additional value created. The incentive to create further value is reduced substantially. If the stock price can rise without an increase in profits mererly because your company is in the good graces with the government, why bother trying to become profitable if the Fed not only protects your stock price on the down side but also provides upside.

The price goes down on the stocks in the Fed’s portfolio, they just buy more.

Why don’t we just say you won and skip the race?

Who benefits from the Fed Buying Stocks?

Who benefits, those holding the assets and the companies that get rewarded merely for having their companies in the stock market.

The Greenspan Put or Moral Hazard

In the fall of 1987 the U.S. stock market crashed 20% in one day. Newly appointed Federal Reserve Chairman Allan Greenspan (author of Gold and Economic Freedom) realized that US dollar and economy were supported in part on the US having the largest most liquid and trusted stock market. A crash of the magnitude that happened on Monday October 19, 1987 had to be remedied.

The next day, the Fed issued a statement saying “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system”

The President’s Working Group on Financial Markets was created by President Reagan’s Executive Order 12631 in March 1988.

Since 1987 the markets have not been allowed to fall for long.

Enter the Greenspan/Bernake Put

During Fed Chairman Greenspan’s tenure he would lower interest rates and cause capital to flow into equity markets when stock fell. Greenspan’s raising of interest rates eventually popped the stock market dot com bubble in 2000. After the dot com bust and post 9/11/2001, Greenspan’s Fed lowered interest rates to 1% creating a housing craze. When the housing bubble burst, new Fed Chairman Ben Bernanke embarked on a multi year quantitative easing program and lowered interest rates to zero. The stock market took off to record highs

The Fed has learned that lowering rates boosts the stock market and that raising them clobbers it. That’s why the Fed has only instituted one rate hike (December 2015) in over ten years. A massive stock sell off followed that one rate hike in January 2016.

Greenspan and Bernanke were criticized for artificially boosting the stock market indirectly and creating a ‘moral hazard that encouraged malinvestments. Because the investments were partially based on the low/no interest rate environment, investors were ‘tricked” into making speculative investment and/or buying the shares of such companies. When the real value of the companies became known, the malinvestments would collapse and be liquidated.

For more on the theory of entrepreneurs and investors being tricked by artificially low rates see:


Here Comes the Yellen Call Option!

While Fed Chairmen Greenspan and Bernanke protected stock investors from downside, Ms. Yellen’s desire to allow the Fed to buy stocks is perhaps promising investors upside.

The Fed has been unable or unwilling to raise rates without spooking the stock market, one of the Fed’s goals. The Fed also realizes that it other goal of supporting the dollar and demand for US Treasury bonds requires that those bonds pay a positive rate of interest.

The solution brewing seems to be, raise rates to put some room between US debt and other sovereign debt that pays no or negative interest rates and then mitigate any stock market fall out by buying stocks. If only congress will let them. In the event of a stock market crash, Congress has already been put on notice that they have the ready made solution: let the Fed buy stocks to reflate the stock market.

Fed’s Buying Stock Impact on Gold


There is no such central bank put or call protection for gold. The only central banks that have been buying gold in any substantial amounts in recent years are the Russian, Chinese and Kazakhstan central banks.

Buying corporate bonds and stocks is more attractive to central banks, than lowering rates because negative rates favor gold. One oft-cited reason not to buy gold was that it didn’t pay interest or dividends. If interest rates are zero or negative, that negates the anti-gold argument.

Where would the Fed get the dollars to buy stocks and wouldn’t that cause price inflation?

Yes, the purchase of shares by the Fed would cause inflation, but inflation of the assets it purchases directly, the share price. If the Fed were to buy Boston real estate or Pablo Picasso paintings, those assets would rise and would have a negligible inflation impact on other prices.

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The Illusion: The Stock Market is no Longer Reflective of the State of the Economy but IS the Economy.

The Fed and other central banks want to perpetuate that illusion. Even though U.S. and global growth is about 1%, stock markets are screaming higher. Already companies that make little or no profits have multi-billion dollar market capitalizations. Under a Fed stock buying plan, profits will become even less important. Rather, service to government aims (surveillance, green energy, hiring of refugees etc.) than customer service can take priority. The stock price will be taken care of by the Fed if private investors sell.

The Danger of Fed Buying Corporate Bonds and Shares

  • Crony capitalism institutionalized;
  • If Fed buys voting shares it can begin to gain control of companies and direct corporate policies including hiring, corporate donations, borrow to declare dividends o buy back shares, power to issue debt (and to buy that debt), to forgive non performing debt and/ or to convert that debt to equity;
  • If Fed buys non-voting shares makes it easier for others to control the company as the Fed’s voting block is neutral;
  • distorts markets;
  • creates non-financial incentives for companies: and
  • when and how does the Fed sell shares?

How Central Banks Introduce Ridiculous Ideas and Make Them Seem Normal

Central banks get their ridiculous ideas to gain mainstream currency from eliminating large bills, to a cashless society,artificially low interest rates, negative interest rates, quantitative easing, monetizing government debt and agency debt, buying corporate bonds, and stocks. They talk about them, ‘intellectuals‘ and other policy makers write about them. One central bank does it, sets a precedent, then others do it and it becomes part of the ordinary ‘tool kit’; a tool kit that must always grow.

Death of Free Markets

The concept that central banks need tools to intervene to ‘fix’ the economy is at the root of sluggish global growth. Each intervention leads to more intervention that rather than ameliorating financial conditions, only makes things worse.

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