Applying Bernanke’s Doctrine: Central Banks ‘Invests’ in Stock Markets

Ben Bernanke’s crash course for central bankers has become the mainstream creed in approaching risks of economic downturn or prospective crises.

To refresh your memories here is what Mr. Bernanke wrote in 2000

There's no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

Zero bound rates and QEs has been the du jour indirect means of supporting the stock market. But there seems to be more…

From Bloomberg,

The Bank of Israel will begin today a pilot program to invest a portion of its foreign currency reserves in U.S. equities.

The investment, which in the initial phase will amount to 2 percent of the $77 billion reserves, or about $1.5 billion, will be made through UBS AG and BlackRock Inc. (BLK), Bank of Israel spokesman Yossi Saadon said in a telephone interview today. At a later stage, the investment is expected to increase to 10 percent of the reserves.

A small number of central banks have started investing part of their reserves in equities. About 9 percent of the foreign- exchange reserves of Switzerland’s central bank were invested in shares at the end of the third quarter, the Swiss bank said on its website.

So central bankers now collaborate with each other to prop up the stock markets.

Central bankers like to keep the “animal spirits” in continued vigor with the hope of instituting permanent quasi booms through 'investments' (which in reality are euphemism for interventionism).

In short, by increasing people’s time preferences, central bank policies have been encouraging monumental speculations, arbitrages, distorting price signals (stimulating 'greed') and prod for consumption activities at the expense of production and savings. Unfortunately, there is an obverse side of quasi perma booms, they are known as economic busts or crisis.