Features

BlackRock is wrong: nationalising capitalism is a bad idea

Asset manager BlackRock thinks the ECB should start buying equities. But that would distort pricing signals; be anti-free markets; and would be almost impossible to unwind, says Merryn Somerset Webb.

Mario Draghi, president of the European Central Bank (ECB) © Alex Kraus/Bloomberg via Getty Images
Mario Draghi has promised to do "whatever it takes"

Earlier this week BlackRock executive Rick Rieder urged the European Central Bank (ECB) to stimulate the eurozone economy by printing money and using it to buy equities.

This idea has attracted rather less comment than it should have, even though it's not a new idea. The Bank of Japan has been buying domestic equities for years: it owns about 75% of the country's exchange-traded fund market and is a top ten shareholder in 40% of Japan's listed companies.

The ECB has also long been incredibly dovish: it has provided more than €2trn of quantitative easing (QE), negative interest rates, endless cheap loans and lots of forward guidance making it clear that this will go on and on and on.

The market has become used to the idea that it somehow makes sense to pay 0.3% or more a year to lend money to the German government for a decade. Thursday's ECB meeting told us that interest rates are expected to remain "at their present or lower levels" at least through the first half of 2020. The language also suggested that a new package of measures is coming with discussion under way about "options for the size and composition of potential new net asset purchases".

More QE isn't as simple as it looks

Buying equities with new money is therefore a possible solution. Brian Pellegrini of Intertemporal Economics explains that it would "respect the capital key" (the relative national shareholdings in the ECB) by buying German assets while also helping to weaken the euro.

Equity purchases could also be a neat way to compensate EU residents for the past decade of extreme monetary policy. If you are a German saver faced with making negative returns on cash deposits for the rest of your life, a stockmarket bubble might make you feel a little better. It might even prompt a little of the wealth effect that works so effectively in the US to prompt consumer spending.

ECB President Mario Draghi said seven years ago that he would do "whatever it takes" to get Europe moving. If he still reckons the eurozone needs his help (which is not a given not all the data is bad), this is about the only option left in his box of monetary tricks.

The trouble with buying equities

But the naked self-interest isn't the main issue here. Nor is the fact that buying equities is unlikely to be of much use. It hasn't worked in Japan and, while I can see how it might push up equity prices (which is nice for people who have equities already), it is harder to see how a central bank buying shares helps anyone else.

To see the real problem with this, we have to step back a long way. Our senses have been dulled by increasingly extreme monetary policy over the past decade, so we must try and look at it afresh. What is being suggested here is that the ECB, a publicly owned institution, prints money and uses it to buy equity stakes in private companies. In other words, the only way to save capitalism is to begin to nationalise it.

Global elites have a full-on meltdown every time the UK opposition leader, Jeremy Corbyn, suggests some kind of "people's QE" or nationalising a couple of utility companies. Yet when BlackRock says this no one blinks.

It isn't quite the same utility nationalisation isn't good for big asset managers, for starters. But it isn't all that different either. Public equity purchases distort pricing signals; they are anti-free markets; they will be almost impossible to unwind; and think of the governance issues. BlackRock likes to promote the idea that big shareholders should be active when it comes to corporate governance. What if one of those big shareholders is a central bank? Should they be active too?

QE isn't working

Instead they would be remembering former Bank of England governor Mervyn King's comments in the depths of the financial crisis in 2009 "any policy measure that is desirable now appears diametrically opposite to the direction in which we need to go in the long term" and they'd be lobbying for something completely different.

Still, there is good news embedded in here. Nervous investors need no longer wonder what to do with their cash: if more QE is coming in the EU and there is even a chance that some of it will involve buying European equities, they should buy European equities BlackRock just put out a note suggesting their clients do that.

This article was first published in the Financial Times

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
The charts that matter: the dollar flexes its muscles
Global Economy

The charts that matter: the dollar flexes its muscles

As the US dollar made significant gains this week, everything else sold off. John Stepek looks at how it's affected the charts that matter most to the…
26 Sep 2020
Tech stocks show why they're the new safe haven
Tech stocks

Tech stocks show why they're the new safe haven

As global stockmarkets tumbled this week, high-flying tech stocks such as Apple and Amazon gained again.
25 Sep 2020

Most Popular

The electric-car bubble could get an awful lot bigger from here
Renewables

The electric-car bubble could get an awful lot bigger from here

The switch to electric cars is driving a huge investment bubble. But that’s not necessarily a bad thing, says John Stepek. Fortunes will be made and l…
24 Sep 2020
Can Rishi Sunak’s winter plan save the UK economy?
UK Economy

Can Rishi Sunak’s winter plan save the UK economy?

With his Winter Economic Plan, chancellor Rishi Sunak is hoping to support the economy through the dark months ahead as restrictions tighten again. Jo…
25 Sep 2020
The rising dollar is proving bad news for most other assets – will it last?
Investment strategy

The rising dollar is proving bad news for most other assets – will it last?

Precious metals, stocks and pretty much every other asset has taken a tumble as the US dollar strengthens. Dominic Frisby looks at how long this trend…
23 Sep 2020