The Elephants in the Room: Banks and the “Almighty” Central Bank

Hari P. Krishnan () and Ash Bennington ()
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Hari P. Krishnan: SCT Capital
Ash Bennington: Real Vision TV

Chapter Chapter 7 in Market Tremors, 2021, pp 201-232 from Springer

Abstract: Abstract Synopsis. In this chapter, we focus on Central Banks and the commercial banking system as a whole. While these agents are always large and active, a meaningful change in their size can have a major impact on asset prices. We will find that, in the median case at least, Fed balance sheetFed balance sheet expansion does have a stabilizing effect on credit spreads. This is not to imply that Central Banks have the power to eliminate extreme event risk. The Fedthe Fed \“Put\” “put” might be free, but it is not guaranteed in size or effect. We will also show how Flow of Funds data, which measures the amount of lending in the system, effectively forecasts long-term equity returns. The back tested results turn out to be stronger than standard valuation indicators can deliver, especially over shorter horizons.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-79253-4_7

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DOI: 10.1007/978-3-030-79253-4_7

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