Central Bank Planning Bad for Business

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Top-down planning could send markets belly-up: New NCPA Study

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Given high expectations for equities, bank interconnectedness and hidden leverage, any weakness in stock markets can easily cascade into a market crash.

Attempts to spur economic growth through central economic planning is pushing us toward meltdowns in both U.S. and foreign markets worse than the crash of 2008, warns a new National Center for Policy Analysis study by financial writer James Rickards.

“The Fed relies on price signals, particularly those related to inflation, commodity prices, stock prices, unemployment, housing and many other variables,” says Rickards. “The more these institutions intervene in markets, the less they know about real economic conditions, and the greater the need to intervene.”

The unintended and unforeseen consequences of the Federal Reserve’s easy-money policies are becoming more visible, often in costly and problematic ways. The study points to:

-- The Fed’s attempts to fight deflation. If the Fed had allowed deflation to happen, consumer goods prices would have fallen, raised the living standard, and increased real wages.
-- The Fed’s zero-interest-rate policy. The zero-interest rate policy penalizes savers in an attempt to encourage investment in risky assets. Yet many savers increased the amount put into savings to compensate for the loss of interest payments.
-- The shriveling of small business lending. The Fed has reduced the interbank lending rate to zero, causing banks to pull out of the market and depriving small businesses of working capital loans and hurting their ability to fund job creation.

"The most alarming consequence of Fed manipulation is the heightened prospect of a stock market crash," says Rickards.

“Given high expectations for equities, bank interconnectedness and hidden leverage, any weakness in stock markets can easily cascade into a market crash,” cautions Rickards. “While a crash isn’t certain, it is likely based on current conditions and past forecasting errors by the Federal Reserve.”

How Central Bank Planning Ruins Markets: http://www.ncpa.org/pub/how-central-bank-planning-ruins-markets

The National Center for Policy Analysis (NCPA) is a nonprofit, nonpartisan public policy research organization, established in 1983. We bring together the best and brightest minds to tackle the country's most difficult public policy problems — in health care, taxes, retirement, education, energy and the environment. Visit our website today for more information.

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Catherine Daniell
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