The Fed as investment Gestapo

The following quote is from article that appeared on Bloomberg.com a few days ago, on July 15, Biotech, Internet Stocks Fall as Fed Cites High Valuation:

Biotechnology and social media stocks slumped as the Federal Reserve said valuations in smaller companies in the industries are “substantially stretched.”

The Nasdaq Biotechnology Index retreated 2.3 percent, the most in a week, and the Global X Social Media Index ETF lost 1.1 percent as of 4 p.m. in New York. Facebook Inc. and Pandora Media Inc. slid more than 1 percent. The Russell 2000 Index of small-cap shares fell 1 percent.

“The market just got spooked with the mention” of biotechnology and social media stocks, Paul Zemsky, the New York-based head of multi-asset strategies at Voya Investment Management LLC, which oversees $213 billion, said by phone. “We’re in a new era of macro policy where the Fed is using new tools to prevent bubbles and raising vocal concerns when markets are away from fundamentals.”

Fed officials have made cautionary statements about valuations for smaller companies already this year. In February, Fed Governor Daniel Tarullo said surging small caps were one reason policy makers should ensure they weren’t creating systemic risk in financial markets.

To be honest, when I asked whether we’d go to the extreme of implementing an investment gestapo in order to make inflation targeting less painful, it was rhetorical; I was being sarcastic. Now, I think I’ve seen everything I need to see to be convinced this inflation targeting regime is completely out of control. We’ve gone from tight money, a broad, blunt instrument by which to rob people to more of a precision weapon against entire industries of publicly traded companies.

Not only do I have little faith that anyone at the Federal Reserve is capable of making the value judgments necessary, but this is so far off the beaten path of the Federal Reserve Act and the Full Employment and Balanced Growth Act, I am not sure where those at the Fed believe they get the authority to do this. It is so unnecessary when there are other viable options that would provide nominal stability, thus financially stability. This is absolute insanity!

PS: It’s the inflation targeting, stupid!

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