The essential Greenspan legacy ... is the idea that the Fed will allow nothing to go really wrong.
|--James Grant, publisher of Grant's Interest Rate Observer|
So far, we have looked at various interventions—in the economy (1930s); in individual companies (Lockheed, Chrysler); and in entire sectors (banking). The next step on our path to becoming a Bailout Nation was when we went beyond any given company or sector bailout. We moved into uncharted territory when the U.S. Federal Reserve began intervening in the entire stock market.
Of course, the Federal Reserve has indirectly impacted all markets by performing its ordinary duties: maintaining price stability and maximizing employment. The Fed engages in a variety of targeted actions, such as changing interest rates, adding or subtracting liquidity, buying and selling Treasuries. These all have an impact on the markets, for better or worse. But that impact is incidental to the operations of the Fed's normal central banking activities. The results are a by-product, not the goal of the central bankers.
Where investors—and taxpayers—should become concerned is when the Fed goes far beyond ordinary central banking operations and seeks to maintain or support asset prices. This is a slippery slope, and, as we shall see, it leads to consequences that have been utterly disastrous.
How the Federal Reserve morphed from a lender of last resort to a guarantor of asset prices is a long and tortured ...