The Fed and Corporate Buy Backs How it Works

Like any issue the corporate buyback phenomenon which keeps stock prices “eternally” rising is simple. Lofty explanations and complex answers evolve because the real one is unpleasant. Nothing that happens in government is any more complicated than making up plays in a sandlot football game.

The Federal Reserve is under a political directive to elevate asset prices, especially stocks. Corporate insiders figured out right away that with the central bank policy the fastest and most efficient way to make many boatloads of money is to use as much free money as possible to engage in corporate buybacks. The reasoning is this. “to heck with research and development. There is no longer a need to invest in plant and equipment. Lets just hype everything, buy our own stock and drive the price into the stratosphere. Making money is why we are in business. Government wants stock prices up so much they aren’t even enforcing accounting laws. Lets do it while it is easy to do. Get is while it lasts.”

The brain is not a fairness seeking organ. Although it seems to be thought of in that capacity. The brain figures out how to survive and prosper as fast and as efficiently as possible.  Corporate buybacks are more efficient than working hard and coming up with new stuff.

So where does the Federal Reserve enter the picture. The Fed’s goal of just sweeping asset prices higher is completely compatible with the corporate goal of making as much money as possible in the shortest period of time. No conspiracy is necessary. Winks and nods are all it takes. The following is how the Federal Reserve orchestrates corporate buybacks.

“Good morning Mr. corporate financial officer, this is good ole’ _____,clerk for the Federal Reserve. You may remember me. We talked a number of months back. We are constantly monitoring and adjusting so,  as you are aware, we do a lot these surveys. This is completely confidential. Sir, last year corporations found it beneficial to buy back some of the outstanding shares. In your opinion, do you believe this practice will be increased or decreased over the next 12 months. Oh, sure all of this is relevant for discussion at Open Market Committee meetings. Bla……Bla……..Bla…….”

After the conversation, the financial officer has no doubts that the Fed likes the buy backs, will make all the money needed available and has his back. So, the buy backs go on and the Federal Reserve continues with its political agenda.

The formal political system in the United States keeps the minds of of constituents busy while everything that matters is done outside of the public eye. It is always a mistake to look for complex explanation of what goes on in public life. The real explanation is always too simple. It usually puts people in a bad light so complex explanations are used instead.


About Fantasy Free Economics

James Quillian is an independent scholar and economist.
This entry was posted in Daily Comments. Bookmark the permalink.