There’s a saying on Wall Street referring to the stock market that “all correlations go to one in a crisis.” Perhaps more accurately, all correlations go to one when a single governing body determines interest rates for the entire economy.
Interest rates are the price of money. Virtually all public companies utilize debt to some degree. When the cost of this debt increases, the stock price of each company must decrease.
The Federal Open Market Committee (FOMC) is a board made up of twelve economists who decide how to adjust the interbank lending rate called the federal funds rate (FFR). For roughly forty years, this rate has been on a secular decline, cheapening the cost of money. All major indices have experienced exceptional growth during this same period (with occasional hiccups due to attempted tightenings). Now, as the FOMC has begun its most recent tightening, it’s no surprise that markets have declined precipitously since from their 2021 highs.
The stock market is not the only victim of rising interest rates. As our economy, small and large and public and private businesses, have become accustomed to cheap debt, the rapid rise of rates is taking its toll. Unemployment claims are beginning to rise, mortgage applications have fallen off a cliff, and many public companies are announcing layoffs. The FOMC is intentionally inflicting pain on the economy to combat inflation many would argue it caused in the first place.
When inflation turned out to not be transitory, millions of working class people suffered the consequences at the grocery store and gas pump. Now, the same economists who were mistaken on inflation are rapidly increasing the cost of operating a business and reassuring us it will not spark recession.
It begs the question, do we need central banks? Do these institutions do more harm than good? And if we do need them, how can we better structure them so as not to create such volatile economic conditions?
In a debate on Wealthion, two economists face off on this very issue. One advocates for a more interventionist Keynesian policy while the other a more laissez-faire Austrian policy, yet both vehemently agree that the current model is broken.
Michael Green, portfolio manager at Simplify Asset Management, argues that the establishment of the Fourteenth Amendment and corporate personhood created a need for the State to socialize individual losses. While Yaron Brook, chairman of the Ayn Rand Institute, pushes back emphasizing that bankruptcy and default are ample mechanisms to achieve this function.
Green would limit central Bank powers to being “the lender of last resort” and the underwriter of government expenditures. Brooke would do away with the institution entirely, leaving free market forces to remedy liquidity crises. For a riveting and thoughtful discussion into the matter, listen to the full debate below:
