Thursday, 11 Nov 2010 08:53 AM
By Dan Weil
The Federal Reserve is rigging the stock market to boost the
economy, and the consequences may be dire, says Jeremy Grantham,
chairman of Grantham Mayo Van Otterloo.
When it comes to stocks, “What I worry about most is the Fed’s
activity,” he tells CNBC.
“QE2 is just the latest demonstration. The Fed has spent most of
the last 15-20 years manipulating the stock market whenever they
feel the economy needs a bit of a kick.”
The Fed knows its easing will have little direct impact on the
economy, Grantham says. “The only weapon they have is the wealth
effect,” he argues. “If you can drive the market up 50 percent,
people feel richer, they feel more confident.”
Academics estimate that people spend about 3 percent of the
total stock market gain. That means last year’s 80 percent gain
in the market boosted GDP by about 2 percent, Grantham says.
“That’s a real kicker, though you don’t see it because of the
enormous drag of the housing market.”
But, “The problem is they step away as the market gathers steam
and resign any responsibility for moderating a bull mark that
may get out of control,” Grantham says.
Grantham also explains why the Fed-stimulated boom-bust
cycle is coming to an end.
"In 2000 the Fed had a good balance sheet and the government had
a good balance sheet. in '08 it was still semi-respectable, and
now it's not. It's not very respectable at all," Grantham says.
"So what are they going to use as ammunition if they cause
another bubble and it breaks in a couple of years? Then we might
have some real Japanese experiences."
Pimco CEO Mohamed El-Erian also criticizes QE2, but for
different reasons. “QE2 (isn’t) good in getting us out of a
world of low growth and stubbornly high unemployment,” he tells
The New York Times Video.
“We need QE2 as part of something much bigger.”
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