Investors are placing far too much faith in money printing by central banks around the world. I cannot help but imagine the quivering thoughts of Ben Bernanke standing behind his curtain as our new Great and Powerful Oz.
The intimidating voice and thundering printing press of today’s Fed are working their magic as asset prices soar ever higher. Yet — like Dorothy standing firmly in place, indignantly demanding honest answer — the real economy remains stuck.
Throughout the years of recovery, I’ve argued that the Fed is doing all it knows to do. By pinning interest rates to the floor and forcing investors to buy something riskier, they can certainly point to financial markets as evidence that at least part of their plan has worked. Since it is impossible to prove otherwise, they also argue the economy is better off as a result of their unconventional and risky policies.
Given this, the Fed has every right to ask, what else should we have done? However, four years into a still-unfinished experiment with an uncertain outcome, the Fed is no doubt left privately wondering, What else can we do, now?
The Fed has placed investors and our entire economy in a precarious position. In an effort to repair the damage inflicted by the real estate crash and ensuing credit crisis, they have simply erected a house built on a weak foundation of rising asset prices. As Oz once placated the brainless Scarecrow, the Fed has doled out little more than paper wealth in order to cure the real economy’s ills.
It has been a lot of paper wealth. Since the low reached in March 2009, the stock market has returned 150 percent. Investment-grade bonds have delivered a total return of about 75 percent and junk bonds have done even better by producing a stock-like return of 150 percent. Finally, their big focus — home prices — have now joined the party by rising 8 percent in the last year alone. The Fed simply cannot ask for more help from asset prices.