The Real Risk-Takers Are at the Federal Reserve – BLoomberg 02-13-13

Salient to Investors:

Caroline Baum writes:

The Fed buys risk-free Treasury securities, depressing yields, while the public is goaded into buying riskier assets, such as stocks and corporate bonds. Businesses financing with equity have more money to invest, while consumers feel wealthier and spend.

The Fed hopes money will flow from asset prices into the real economy, but that is not always the case. In the last decade consumers spent on buying new homes as prices became untethered from their anchors and housing wealth translated into unspectacular economic growth.
Michael Bordo at Rutgers University said the value of housing went up more than the real value determined by the flow of services people get from it. Real GDP from 2001 to 2007 grew at less than the postwar average, as did employment, consumer spending, investment, wages and salaries – with the exception of corporate profits. Bordo says monetary stimulus in the 1970s went into goods and services prices via commodity prices causing “the great inflation.”
Fed Governor Jeremy Stein sees significant reaching-for-yield behavior in both the high-yield and syndicated-loan markets, but says that even if junk-bond investors end up taking a hit, it need not follow that this risk-taking has ominous systemic implications.
Marvin Goodfriend at Carnegie Mellon says the Fed has done a poor job of explaining the transmission of monetary policy once the funds rate hits zero, and injects more money than people need as they try to spend it away on things.
Monetarists are a dying breed at the Fed, despite inflation being a monetary phenomenon.

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