Reply #7: A helpful suggestion for the Fed / Willem H. Buiter

[Demeter]

http://blogs.ft.com/maverecon/2008/01/a-helpful-sugge.html


It is now clear beyond a reasonable doubt that the Fed wants to prevent sudden sharp drops in the stock market. It has not, however, drawn the logical conclusion from this endogenous widening of its mandate. So instead of pussyfooting around with 75 basis point cuts in the target for the Federal Funds rate, I propose that the Fed put its money where its heart is by engaging in outright open market purchases of US stocks and shares.

By intervening through the purchase of the most broadly-based value-weighted index of US stocks, e.g. the Wilshire 5000 Total Market Index, any unlevelling of the playing field between listed stocks can be avoided. I would prefer the Fed to acquire only non-voting shares, or to put any shares it acquires in a blind trust, to avoid any temptation to micro-manage the enterprises whose shares it purchases. On January 25 the Wilshire 5000 index stood at 13,423.62. The 52-week peak was on October 7, 2007 at 15,806.69. Let's split the difference and request the Fed to put a floor below the Wilshire 5000 at, say, 14,500.00. If the Hong Kong Monetary Authority can make large-scale domestic equity purchases during the Asian Crisis in 1998, the Fed can make large-scale domestic equity purchases during the North Atlantic Financial Crisis in 2008.

What I propose is effectively the same as the Fed attaching a free put option to every equity share in a US-registered and-listed enterprise. It would put paid forever to all those jokes about the Greenspan put and the Bernanke put.

Let's do it!

Author's Bio: Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.