Friday, March 2, 2012

Central banks begin to buy stocks

By Bill Wilson

A small number of central banks around the world have begun investing their foreign exchange reserves in equities, according to Bloomberg News. These include the Swiss National Bank, the Bank of Israel, South Korea and others. 

So far it’s not much, several billion in stock buys by central banks. But all over the world, there are about $10.2 trillion of foreign exchange reserves that could be tapped, according to the International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves (COFER) database.

Interestingly, the IMF notes that “COFER data for individual countries are strictly confidential.” So, when central banks flood equities markets with excess reserves, investors likely won’t know until after the fact, and then, only if such purchases are disclosed.

But why would central banks purchase stocks? Aren’t those… risky?
In 2000, none other than current Federal Reserve Chairman Ben Bernanke — then a professor — commenting on Japanese policies after their housing bubble popped in 1989, included corporate bond and equity purchases in his menu of options that might be pursued in an environment with near-zero interest rates.

Bernanke left no mistake that the reason to boost aggregate demand in this fashion is to raise prices: “The object of such purchases would be to raise asset prices, which in turn would stimulate spending”.
Vince Reinhart, then Fed Director of its Division of Monetary Affairs, at Federal Open Market Committee (FOMC) meeting in June 2004 described the circumstances under which a central bank might engage in such purchases: “if the policymakers believed that deflationary forces were severe.”

Reinhart also dismissed the possibility at the time, saying, “These options would change how we are viewed in financial markets, involve credit judgments of a form we are not used to, perhaps smack of desperation, and pull us into a tighter relationship with other parts of government.”
Get full story here.

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