The stock markets are being suffocated by the speculative bubbles fueled by the central banks

The stock markets have become, especially over the last few years, a favorite target of the monetary policies of the central banks. The goal is clear: the cheap money has to cause stock prices to rise, a phenomenon which will lead to the amplification of the "wealth effect", necessary for the beginning of a new period of optimism for consumers.

But most of the small shareholders, who can't handle the increasingly overt manipulations of the markets, amid the absolute domination of algorithmic trading, have yet to feel this effect.

Even under these circumstances, the stock markets in the developed economies, dependent on cheap money, have suddenly lost their optimism, as there is an increasing number of signs that the central banks have lost control of the cost of financing.

Solutions were immediately found in the United States. The structure of the Dow Jones index was recently changed, by removing the stocks of Alcoa, Hewlett-Packard and Bank of America from the index and the introduction of the shares of Goldman Sachs, Visa and Nike. Thus, it has come to the point where the Dow Jones Industrial Average has almost nothing to do with the "industrial" part of its name.

Will such a makeover be enough to allow the growth trend that the Federal Reserve is seeking? Apparently not. It would seem that a new "dissident" has appeared in the upper ranks of the U.S. central bank, namely John C. Williams, President of the Federal Reserve Bank of San Francisco, who recently admitted that "undesirable results of monetary policies can take the form of speculative bubbles".

He said, in a press conference organized by the National Association for Business Economics, that "the booms and the crashes of the prices of financial assets distort the course of the economy and leave behind them economic ruins ".

Referring to the manner of action of the central banks, Williams said that "they build imaginary worlds, which are populated with characters that act according to some strict, preset rules" and then "we study what happens". It seems that the analysis is pointless, because "the prices of financial assets have proven to be less obedient to this approach ".

The president of the San Francisco Fed reminded that, "under the current vision, the hike of the prices of the financial assets is not the result of speculative excesses, but rather they of the manifestation of the fundamental elements of the market". Through a parallel with the novel "Through the Looking-Glass" of Lewis Carroll, John Williams said that the supporters of this theory are ready to accept the existence of speculative bubbles in the past or in the future, but never in the present.

"There is always a reason why what looks like a bubble, walks like a bubble and quacks like a bubble, is not actually a bubble", Williams said.

Going back to the importance of monetary policies, John Williams placed the emphasis on "the recognition of the factor driving the evolution of the prices of financial assets, which means that the future work on the monetary and financial policies needs to focus on the manner in which they will amplify or temper the cycles of prices and not on the manner in which responses to their evolution are made".

Another dissident, Charles Plosser, the president of the Federal Reserve Bank of Philadelphia, recently said that the Fed must stop the quantitative easing by the end of the year, "because we do not want to create another real estate bubble".

Could this be a late admission of the fact that the Federal Reserve is responsible for the real estate bubble in the US in the first half of the previous decade and on its disastrous effects on the world economy?

Even though most central bankers are denying their responsibility for the financial crisis of the last few years and are trying to come up with all kinds of justifications for their inaction, out of interest or ignorance, there are some exception.

Janet Yellen, who up until recently was the top contender as the successor of Ben Bernanke after his departure, told the Commission for the Investigation of the Financial Crisis in 2010, that "we have not noticed and have not evaluated the risks of securitization, of the ratings firms and of the shadow banking system until they happened".

The admission of the fact that speculative bubbles are caused by the central banks has not prevented the head of the San Francisco Fed to state that "the speculative bubbles in the prices of financial assets and the subsequent collapses will stay with us. They seem to be a consequence of human nature".

What will happen next? What the economists of the Austrian School have predicted. The speculative bubbles are not a consequences of human nature, but rather of the actions of the central banks. "There are no means to avoid the final collapse of the boom generated by the expansion of lending", Ludwig von Mises wrote many years ago.

In an article recently published on the website cursdeguvernare.ro, Valentin Lazea, the chief-economist of the NBR, writes that "countries that rely less on the financing of the economy by banks (US, Great Britain) and which favor the financing of the economy through the stock market seem to exit recessions fasters". Ironically, perhaps, the title of the article is "What the economists have learned (?) from the recent recession".

Unfortunately, there is no tangible evidence of the so-called "stock market financing of the economy". The upsurge of the stock markets in the US and in the UK has been stimulated by the unprecedented "relaxation" of the monetary printing presses, and the hike of the printing presses took place amid volumes that are nearing two-decade lows. The article of the chief-economist of the NBR shows that economists, especially those of the central banks and the government cabinets, have learned nothing from the recent recession.

In this context, the BURSA newspaper is holding a round table with the topic "The strategy for the revival of the stock market", where it needs to be reminded that aside from the uncovered obstacles and the proposed solutions, the role of the monetary policy of the National Bank is crucial.

It is enough to look at the explosion of the stock market indexes of the BSE prior to the beginning of the global crisis to note the huge discrepancy between the "performance" of the stock market and that of the economy which is supposed to be behind it.

The so-called economic growth was only the result of a lending bubble, while the NBR was watching approvingly from the sidelines. In all of these years, the economy has been depleted of productive capabilities, and real estate speculation replaced them.

We are now wondering what is to be done for the revival of the stock market. The proposals to liberalize the regulated market, by introducing bearer shares and reducing the role of brokerage firms, are welcome, but, even if they are adopted, they can't produce miracles as long as the NBR is manipulating the interest rates in the market in the name of financial stability or of the stimulation of economic growth.

The good practices in the activity of the brokerage firms can't be achieved through new regulations, that would be "overseen" by an inept institution like the CNVM, even if it has now been disguised under the umbrella of the Financial Supervision Authority.

The good practices can only be the result of the supreme power that leads to the good functioning of the free markets, even in the absence of a universal faultless ethic: fear of bankruptcy.

All of these mechanisms for the self-regulation of the market are being ruined by the manipulation of the interest rates by the central banks, a phenomenon which creates an extremely hostile environment for capital formation.

And without capital there can be no stock exchanges and no economic development.