Fed Is Camouflaging The True Cost Of Capital And Hiding The Funding Risk Of Our Tax And Spend Policies

From The Wall Street Journal, "The 'Financial Repression' Trap: In capitals world-wide, policy makers deliberately obscure market prices and prevent informed judgments." by Kevin Warsh, former Federal Reserve governor:

Markets are not always efficient, but the market-clearing prices for stocks, bonds, currencies and other assets (like housing) are critical to informing judgments, in good times and bad. Market-determined asset prices often reveal inconvenient truths. But the sooner the truth is revealed, the sooner judgments can be rendered and action taken.

By contrast, government-induced prices send false signals to users and providers of capital. This upsets economic activity and harms market functioning. Markets that rely on governmental participation will turn out to be less enduring indicators of value.***Financial repression is sometimes the effect of policy even if it is not the intent. It manifests itself, for example, when policy makers react more forcefully to declines in asset prices than to increases. Price increases tend to be treated with benign indifference. But declines often lead policy makers to respond with force, deploying fiscal stimulus and monetary accommodation. Market participants then conclude that governments have their backs.

Consider the fiscal trajectory of the United States. However well-intentioned, the Federal Reserve's continued purchase of long-term Treasury securities risks camouflaging the country's true cost of capital. Private investors are crowded out of the market when the Fed shows up as a large and powerful bidder. As a result, the administration and Congress make tax and spending decisions—with huge implications for our standard of living—with heightened risks around future funding costs.