Apologies for the pay-walled link, but this Wall Street Journal article documenting the cheery fortunes of the Swiss National Bank really is remarkable. It’s remarkable not only because the SNB actively chose to pour hundreds of billions of Francs into foreign stock purchases, or because currency devaluation remains a cornerstone of Swiss monetary policy (hasn’t the fetish for exports been conclusively debunked?). What is most remarkable is the Journal’s blasé attitude about the whole thing: nothing new to see here, folks. Of course central banks own stocks, why it’s the current year!
The SNB’s profit was lifted by a trio of positive forces: low bond yields preserved the value of its foreign bonds; higher equity prices raised the value of SNB holdings that included $2.8 billion in Apple Inc. stock at the middle of 2017 and $1.3 billion in Facebook Inc. and the weaker Swiss currency made those foreign assets worth more in franc terms. For the first nine months of 2017, the SNB’s profit was 33.7 billion francs. Of that, over 14 billion francs was from rising equity prices and another 10.5 billion francs came from the valuation effects of the weaker franc, which fell around 5% against the euro last quarter.
Not a bad paper gain for a nation of only 8.5 million people. But the rumor is stocks sometimes actually go down, while gold and cows and fine watches and chocolate have a slightly more enduring Swiss feel to them.
The SNB of course merely followed in the footsteps of the Bank of Japan and other central banks which own equities. And the ECB continues to flirt with the idea. But if the notion of central banks “embracing risk” and seeking returns sounds like moral hazard writ large to you, you’re not thinking like a banker: large piles of reserves just laying around demand some kind of yield!
Is it really so far-fetched to imagine the Fed snapping up FAANG shares to prop up the NASDAQ during a rough patch? Or simply buying equities and corporate bonds generally, across the board, in the event of an economic downturn? It’s an idea Janet Yellen already floated at the Fed’s annual Jackson Hole meeting last year. It would require legislation (US law currently forbids the Fed from buying stocks), but given how obliging Congress was during the 2008 Crash it’s hard to imagine much resistance the next time Wall Street gets shaky.
At this point can anyone still argue with a straight fact that the Fed exists as the “banker’s bank,” a neutral referee in financial markets and a lender of last resort?
