Fed could bail out Wall Street after market crash, says ING chief
The Federal Reserve could be forced to step in and bail out Wall Street in the event of a stock market meltdown, an executive at the banking giant ING has said.
Bob Homan, global chief investment officer, said the US central bank could mimic efforts by the Japanese government in 2002 and 2009 when it took stakes in failing financial institutions during banking crises.
Stock markets have endured sharp corrections this year as a result of the Iran war and concerns about surging valuations among AI-linked companies.
The benchmark S&P 500 on Wall Street dropped nearly 8pc following the outbreak of the Middle East conflict but has climbed 19pc since then as tech stocks have rocketed.
Many analysts have raised concerns that stocks linked to AI are beginning to show signs of entering bubble territory, echoing the era before the dotcom crash in the early 2000s.
Asked whether the Fed might ever buy stocks to support the market, Mr Homan said: “I think so. You saw it in Japan, where the government was at a certain moment holding 10pc of all the equity in Japan.
“Even with some market crashes, the Fed or the ECB step in. You don’t notice it but it acts like a kind of safety buffer.”
The Bank of Japan finished selling off its holdings of stocks bought from 2002 to 2010 only last year. It intervened following a sharp drop in share prices, which was aimed at avoiding chaos in Japan’s banking system.
Such an intervention would be highly controversial as it would effectively mean that soaring stock valuations are being underwritten by central banks.
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However, it would echo previous responses aimed at avoiding more severe economic consequences in crises.
The Bank of England, Federal Reserve and European Central Bank (ECB) all bought corporate bonds as part of their quantitative easing programmes following the global financial crisis and the pandemic.
Nothing under the EU Treaty prevents the ECB from making such interventions in stock markets. The Statute of the ECB even states it can “operate in the financial markets by buying and selling outright”.
The Bank of England, Federal Reserve and ECB all declined to comment.
Bradley Saunders, an economist at Capital Economics, said a severe market downturn would put retirement savings at risk in the US, as so many Americans hold their wealth in stocks.
Roughly 156 million US adults, or 58pc of the population, owned stock in April this year, according to Gallup.
Mr Saunders said: “Wealth built through the stock market forms a far greater share of overall wealth in the US than in other economies due to both economic (eg smaller social security net) and cultural factors.
“For that reason, a severe market downturn would of course be damaging for retirement savings.
“Whether it would lead to the Fed intervening to buy stocks is another matter entirely.”