Press Mostly Yawns, CNBC's Santelli Goes Off as Fed's Yellen Wants to Be Able Buy Stocks

On Thursday, Federal Reserve Chairman Janet Yellen suggested in a videoconference call, as translated into plain English by the Wall Street Journal, that "there could be benefits to allowing the central bank to buy stocks as a way to boost the economy in a downturn."

This advocacy of what would be a serious and perhaps permanent move away from market-based allocation of resources and risk to a government-created entity directly intervening and affecting market values — potentially, in effect, exercising control over the means of production — got a brief writeup at Reuters. The Associated Press made what Yellen said almost an afterthought in a dispatch which was primarily about Fed's "diversity" efforts in its own hiring practices. Then on Friday afternoon, Rick Santelli at CNBC cut though the fog with what the contrarian blog Zero Hedge has described as "3 minutes of brutal reality" blasting the idea.

Here are the earlier paragraphs in the Journal's informative Thursday report (bolds are mine throughout this post):

Federal Reserve Chairwoman Janet Yellen said Thursday there could be benefits to allowing the central bank to buy stocks as a way to boost the economy in a downturn.

Speaking to a minority bankers’ conference at the Kansas City Fed via videoconference, Ms. Yellen said stock-buying could be a tool for policy makers in the future.

“There could be benefits to the ability to buy either equities or corporate bonds,” she said in reply to a question from the audience. “There would also be costs as well that would have to be carefully considered in deciding whether that would be a good idea.”

The Fed doesn’t have legal authority to buy stocks. After the financial crisis, it bought Treasurys and mortgage-backed securities to push down long-term yields to encourage borrowing, spending, hiring and investment.

In an appearance before the House Financial Services Committee on Wednesday, Ms. Yellen said the Fed wouldn’t be able to buy equities unless Congress changed the law.

Fed officials have been thinking about new tools it can use to make policy now that interest rates and inflation are expected to remain low for the foreseeable future. That leaves less room to cut short-term borrowing costs to spur economic activity, the Fed’s primary policy measure.

“If our economy were hit by a negative shock and the Fed needed to intervene to stimulate the economy, we have less room using our conventional overnight interest rate tool to do that,” Ms. Yellen said Thursday. “We need a wider range of tools.”

The problem really that the Fed is now in a position where, thanks to misguided maneuvers under the Keynesian-based leadership of Yellen and her predecessor Ben Bernanke, is out of tools.

Eight years of Keynesian stimulus haven't brought the economy back to a point where Yellen feels confident enough to be able to raise interest rates above virtually zero. But it never occurs to these geniuses that what they believe is "stimulus," in combination with the worst federal fiscal policy ever (almost $9 trillion in additional debt since Barack Obama took office) has failed to stimulate anything except the worst post-recession economy since World War II.

Yellen probably knows that any serious suggestion of the idea of trying "negative interest rates" in the US, as the European Central Bank has done this year, would create a flight of cash from bank accounts into mattresses like has never been seen in history. That leaves buying other instruments, including corporate stocks, in hopes that it might bid up prices to create trillions in artificial wealth which newly giddy "rich" people might then spend enough to genuinely bring the economy back.

That "plan" doesn't pass the smell test, and that's just the start of it, as CNBC's Santelli explained, while tying in what we've seen in monetary policy during the past eight years to the growing and potentially very serious problems at Deutsche Bank:

Transcript (beginning at the 0:09 mark):

RICK SANTELLI: You know, there are many lessons to be learned from Deutsche Bank — and I'm not really talking about the ones that you the viewer or listener on the radio may be thinking of. My lesson is: central banks.

Now I'm not here to say they've had bad intent. I think all central bankers truly want to help.

But please, don't help any more, okay?

Let's think about this. So, the bailing out the system after the credit crisis (in 2008). And what we've had since are years and years of digging more "help," finding more "help," looking for more free "help." Easy money. How has it really helped anything?

I'll use the same analogy I've used for years. You can't wallpaper over termites forever, okay? Deutsche Bank has plenty of issues we don't need to get into. But one issue that's going to affect not only Deutsche Bank and the European banks, it's going to affect the Japanese banks, the emerging market banks, and our banks is the fact that the more negative interest rates prevail, the worst profitability is going to be.

But it can get worse, and I'll tell you why. Do you think the Swiss national bank, or the Bank of Japan, or even with regard to corporates, the ECB, the other two or stocks. Central banks buying in the markets? Do you really think that's a good idea?

Lets use Deutsche Bank as an example. Let's say the stock of Deutsche Bank keeps going down. The CoCo bonds keep converting into equity. Everybody keeps blowing it out. What if the central banks all get together and decide, "Well, okay we don't want that to happen. Let's buy Deutsche Bank"? Or when any other bank or company is in trouble, "We'll buy that."

Or as you get to political highlight points, like election times, you want to keep everything pretty clean, make sure nothing goes down. Is that the world we really want to live in?

Here's where I'm going with this. Janet Yellen recently, and it's all over every blog and every tongue of every trader, is considering the costs and benefits of doing things like other central banks. Maybe buying equities, maybe buying corporates. It's a bad idea!

It's not only the fact of who gets to pick and choose, it will completely and utterly in every possible way destroy any value in the marketplace. Completely! It will be a useless investment.

What's good is it without price discovery, without people getting together and using the markets to either add to risk or dispense of their risk to actually get a large group of individuals whether in a group or on an electronic platform to bid and offer to come up with a true price reflecting the fundamentals of whatever they're trading?

A backstop by central banks is not only horrible — and the final joke here is that in order for Janet Yellen & Company to do any of that, they would have to go and get permission from Congress. I will just leave it at that. Think about that congressional hearing. Back to you.

Well Rick, I hate to break it to you, but given the example of the Obama administration during the past eight years, what's to stop Yellen from unilaterally deciding that she doesn't need Congress's blessing? I can hear it now: "The emergency is too great and we don't have time for the legislative process." What if she just went out, started buying stocks and bonds as she sees fit, and said, "Try to stop me"? Who would?

In the brief space of three minutes Santelli brought up several valid issues about Yellen's idea that the establishment press, even the business press, seldom if ever raises — either because the reporters involved don't understand or care to understand how the markets really work, or because they don't really like the markets and capitalism in general.

Cross-posted at BizzyBlog.com.

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