February 5, 2011
Bernanke The Bully
Bernanke caused quite the stir when he suggested back In November that QE2 was working because stock prices were rallying. Here is the quote that made the rounds:
“This approach [printing money] eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth.”
Mr. Bernanke went a few steps further last week when he contended, with great convolution, that stock prices are simply a tool the Fed uses:
“First, to be very clear, the purpose of monetary policy easing is not to increase stock prices per se, the purpose is to strengthen the U.S. economy, put people back to work, and create price stability. But, the way monetary policy always works is through interest rates and asset prices -- that's how it always works -- by changing those prices in financial markets. “
In other words, the Fed ‘always’ uses monetary policy to manipulate asset prices, but the underlying goal is always to strengthen the U.S. economy. This peculiar explanation of monetary policy seems akin to someone saying they like to have 1-night stands because they are looking for love, but I digress:
“So yes, I do think that by taking these securities out the markets and pushing investors into alternative assets, we have led to higher stock prices and to lower stock market volatility.”
Notice here how Bernanke gets more involved, suggesting that the Fed wants to push (i.e. punish) some investors/savers so that they move their hard earned dollars into what the Fed believes to be preferable ‘alternatives’. Finally:
“So yes, the policy is affecting the stock market really in two ways. One is by...lowering essentially long-term yields and forcing investors into alternative assets…”
Monetary policy is being used to ‘force’ investors into ‘alternative’ assets? [or assets that tend to rise when interest rates fall] Obviously everyone knows this is the case, but it sounds so deceitful when Bernanke says it.
At risk of turning this into an uncontrollable rant that quickly degrades to name calling, let me simply say the notion that people and businesses need central bank scheming to somehow incentivize their behavior towards some Fed-conceived utopia is idiotic. The Fed needs the economy to respond to its schemes in order to justify its unnecessary existence, but ‘the economy’ does not need a Fed per se. In short, cheap money essentially makes people do stupid things. Take what you want from Bernanke applauding his power to print…
C-Span Video with Bernanke Q&A C-Span Highlights
What's Bernanke Smoking? "A Complete Mystery" How QE2 Helps the Economy, Galbraith Says TTicker