Outside the Box: It’s a no-brainer that Federal Reserve and congressional policymakers should be barred from the stock market. We should go one step further

The Federal Reserve has announced a sweeping set of strict rules to prohibit employees from owning individual stocks, bonds, agency securities and derivatives.

This is welcome news following reports of regular and sometimes frequent trading by the most senior Federal Reserve officials, which creates, at a minimum, the appearance of a conflict of interest. The presidents of the Federal Reserve banks of Boston and Dallas are resigning following the revelations.

Fed Chairman Jerome Powell said last month: “We need to do better, and we will.”

But the changes don’t go nearly far enough, as the Fed remains too involved in the financial markets, and the U.S. government, more broadly, maintains widespread conflicts.

This set of regulations ought to encompass all of Congress. Reports of insider trading in the House of Representatives and Senate have been rampant for years. The fact that politicians are allowed to hold securities that they can directly impact via policy is preposterous.

As Sen. Elizabeth Warren of Massachusetts has correctly said:

“You shouldn’t have to wonder whether your members of Congress are looking out for you or lining their own pockets. My plan to #EndCorruptionNow will ban senators and representatives from owning or trading individual stocks while in office.”

This is just common sense, but nothing changed in Congress even after it became evident that several U.S. senators sold millions of dollars of stock after being briefed about the dangers of Covid in early 2020. It’s time for Congress to follow the Fed’s lead and ban the ownership of these securities.

But we shouldn’t stop there.

There is a growing trend around the world where central banks and governments have become increasingly involved in owning public stocks through policies such as quantitative easing, which are designed to provide stimulus to the economy.

The Bank of Japan is the largest owner of public equities in Japan. The Swiss National Bank has purchased so much of the global stock market that the U.S. Treasury deemed it a “currency manipulator” in 2020.

While the U.S. central bank has not yet dipped a leg in the domestic equity market, there are clear signs that it’s veering in that direction. Following Covid, the Fed purchased billions of dollars of high-yield bonds and fixed-income ETFs.

Those policies set several alarming precedents that are potentially harmful:

  1. They reduce the free float of secondary market shares in a world where the central bank is already suppressing rates. This means that dividends and capital gains that could flow to individuals including you and me are instead flowing to an entity that doesn’t even need income to operate.

  2. They perpetuate the ineffective policies of QE, which we now know are far less effective than we might have originally believed.

  3. They potentially boost asset prices, thereby resulting in short-term booms that could lead to long-term busts.

We should not only ban policymakers from intervening in their own private portfolios. We should also prohibit them from increasingly influencing public markets via policies that are ineffective, at best, and contribute to bad outcomes for all of us, at worst.

Cullen Roche is founder and chief investment officer of Discipline Funds, a financial-advisory firm. He is the author of the Pragmatic Capitalism blog, where this column first appeared. Follow him on Twitter @cullenroche.

This post was originally published on Market Watch

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