This idea has attracted rather less comment than it should have, even though it’s not a new idea. The Bank of Japan has been buying domestic equities for years: it owns about 75% of the country’s exchange-traded fund market and is a top ten shareholder in 40% of Japan’s listed companies.
The ECB has also long been incredibly dovish: it has provided more than €2trn of quantitative easing (QE), negative interest rates, endless cheap loans and lots of forward guidance making it clear that this will go on and on and on.
The market has become used to the idea that it somehow makes sense to pay 0.3% or more a year to lend money to the German government for a decade. Thursday’s ECB meeting told us that interest rates are expected to remain “at their present or lower levels” at least through the first half of 2020. The language also suggested that a new package of measures is coming – with discussion under way about “options for the size and composition of potential new net asset purchases”.
More QE isn’t as simple as it looks
Investors expect more rate cuts and a bit more QE to come in September. But everyone also knows that further QE isn’t as simple as it looks. Germany is running out of Bunds (government bonds), thanks to running a budget surplus, and ECB buying has to be proportional to the size of its constituent countries. So Germany needs to run a deficit to sell Bunds to the ECB or allow the development of eurobonds guaranteed by Germany. If it won’t, the ECB has to get seriously creative.
Buying equities with new money is therefore a possible solution. Brian Pellegrini of Intertemporal Economics explains that it would “respect the capital key” (the relative national shareholdings in the ECB) by buying German assets while also helping to weaken the euro.
Equity purchases could also be a neat way to compensate EU residents for the past decade of extreme monetary policy. If you are a German saver faced with making negative returns on cash deposits for the rest of your life, a stockmarket bubble might make you feel a little better. It might even prompt a little of the wealth effect that works so effectively in the US to prompt consumer spending.
ECB President Mario Draghi said seven years ago that he would do “whatever it takes” to get Europe moving. If he still reckons the eurozone needs his help (which is not a given – not all the data is bad), this is about the only option left in his box of monetary tricks.
The trouble with buying equities
So what’s the concern? First of all there is something markedly unattractive about seeing BlackRock, the world’s largest asset manager, suggesting that a central bank adopt a policy specifically designed to push up equity prices.
But the naked self-interest isn’t the main issue here. Nor is the fact that buying equities is unlikely to be of much use. It hasn’t worked in Japan and, while I can see how it might push up equity prices (which is nice for people who have equities already), it is harder to see how a central bank buying shares helps anyone else.
To see the real problem with this, we have to step back a long way. Our senses have been dulled by increasingly extreme monetary policy over the past decade, so we must try and look at it afresh. What is being suggested here is that the ECB, a publicly owned institution, prints money and uses it to buy equity stakes in private companies. In other words, the only way to save capitalism is to begin to nationalise it.
Global elites have a full-on meltdown every time the UK opposition leader, Jeremy Corbyn, suggests some kind of “people’s QE” or nationalising a couple of utility companies. Yet when BlackRock says this no one blinks.
It isn’t quite the same – utility nationalisation isn’t good for big asset managers, for starters. But it isn’t all that different either. Public equity purchases distort pricing signals; they are anti-free markets; they will be almost impossible to unwind; and think of the governance issues. BlackRock likes to promote the idea that big shareholders should be active when it comes to corporate governance. What if one of those big shareholders is a central bank? Should they be active too?
QE isn’t working
Finally, the ongoing shift towards increasingly bonkers monetary bazookas is surely more evidence that the whole thing just isn’t working. If the big financial firms could see beyond their own business models they wouldn’t be asking for more measures to stabilise the status quo.
Instead they would be remembering former Bank of England governor Mervyn King’s comments in the depths of the financial crisis in 2009 – “any policy measure that is desirable now appears diametrically opposite to the direction in which we need to go in the long term” – and they’d be lobbying for something completely different.
Still, there is good news embedded in here. Nervous investors need no longer wonder what to do with their cash: if more QE is coming in the EU and there is even a chance that some of it will involve buying European equities, they should buy European equities – BlackRock just put out a note suggesting their clients do that.
• This article was first published in the Financial Times