Submitted by Taps Coogan on the 6th of February 2016 to The Sounding Line.
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In an excellent interview posted below, CNBC’s Rick Santelli recently spoke with Bianco Research President Jim Bianco on the subject of interest rates, central bank policy, and the ‘Wealth Effect’.
Central bank policy is major theme here at The Sounding Line and has been the focus of an ongoing series of articles from ‘The Fed- Missing the Curve’ (link here) to ‘Negative Interest Rates – The Excess Reserve Overhang’ (link here). This interview is a perfect primer for an upcoming post that will look specifically at the ‘Wealth Effect’ and whether it is truly a credible theory.
The ‘Wealth Effect’, in one form or another, has served as the philosophic foundation of central bank policy since Alan Greenspan took the reins at the Federal Reserve in the late 1980s. From manipulating interest rates to injecting liquidity into banks, nearly all central bank policy can be understood through the lens of the ‘Wealth Effect’.
Boiled down to its most basic elements, the ‘Wealth Effect’ is a belief that central banks can manipulate the financial system in order to levitate certain asset prices. If asset classes like stocks or real-estate go up in value, it will result in profits for investors. Investors will spend those profits in the ‘real’ economy, creating economic growth and confidence, and a self-sustaining cycle rising asset prices and economic growth will ensue.
Stay tuned for an upcoming article that looks critically at the ‘Wealth Effect’ and what it really means.