Loading ...The central banks called it a “wealth effect”.
They knew it wasn’t real wealth.
Does inflating asset prices create real wealth?
Unfortunately not.
What goes wrong with free markets?
They found out in the 1930s, after believing in free markets in the 1920s.
Henry Simons was a firm believer in free markets, which is why he was at the University of Chicago in the 1930s.
Having experienced 1929 and the Great Depression, he knew that the only way market valuations would mean anything would be if the bankers couldn’t inflate the markets by creating money through loans.
Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money, so that free market valuations could have some meaning.
The real world and free market, neoclassical economics would then tie up.
1929 – Inflating the US stock market with debt (margin lending)
2008 – Inflating the US real estate market with debt (mortgage lending)
Bankers inflating asset prices with the money they create from loans.
What was the transmission mechanism from FED QE into the markets?
The FED QE went into bank reserves and they used margin lending to get it into the markets.
Bankers inflating asset prices with the money they create from loans.
If only the University of Chicago had remembered what they used to know, they would have seen the problem.
(Edited)