Stocks jump as Bernanke opens door to new stimulus

That’s today’s headlines.  But you might ask “weren’t the high inflation 1970s really bad for stocks?”  Yes they were.  Just like in the story of the three little bears, the stock market doesn’t want too much inflation, nor too little.  Something for the inflation hawks to think about.

HT:  Joe Cambria


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25 Responses to “Stocks jump as Bernanke opens door to new stimulus”

  1. Gravatar of W. Peden W. Peden
    13. July 2011 at 07:54

    It’s as if the markets know the importance of stable prices better than monetary policymakers…

  2. Gravatar of Silas Barta Silas Barta
    13. July 2011 at 08:02

    Whoo-hoo! I just *love* when the authorities prop up stock values! It’s so *vital* to productive activity!

  3. Gravatar of John John
    13. July 2011 at 08:30

    I think it’s interesting that economists, like Sumner, who are from a school of thought which really believes in the beneficial powers of the central bank are rarely happy with what that central bank is doing. Furthermore, it’s hard to find any two monetarists out there who completely agree on monetary policy. The Monetarists should join the movement to end the Federal Reserve. It’s clear by now that centrally planned money and banking doesn’t work and guys like Sumner who call themselves conservatives or libertarians should embrace the power of markets in the banking sector.

  4. Gravatar of Scott N Scott N
    13. July 2011 at 08:53

    The sad thing is that I didn’t get that out of his prepared remarks. I think the market is much more optimistic for QE3 than is warranted, especially since the inflation hawks on the FOMC think inflation is far to high to justify further easing right now.

  5. Gravatar of David Beckworth David Beckworth
    13. July 2011 at 09:43

    John:

    You need to read Sumner’s work on targeting a futures index (see link below). If you do you will learn that it effectively turns over monetary policy to the market. That is Sumner’s ultimate goal. Sumner, however, is also a pragmatic and understands market reforms like the one he proposes are along way off. Thus, he works with that institutions at hand.

    http://www.bepress.com/bejm/contributions/vol6/iss1/art8/

  6. Gravatar of Benjamin Cole Benjamin Cole
    13. July 2011 at 09:44

    The Fed is dithering, feeble and weak–why not just import staffers from the Bank of Japan? Bernanke needs an iron will to stare down the Chicken Inflation Littles.

    Stable prices? Tell us how Japan has boomed with stable prices. A strong dollar? The yen has doubled since 1990, and Japan is becoming a backwater nation.

    Boost stock markets? Well, why not? Would we prefer an 80 percent permanent tumble in equities and real estate markets, ala Japan?

    Tight money is a noose around an economy’s neck.

    US influence in the world is rapidly waning, as our economy shrivels. China has become the largest source of capital for the developing world, easily outstripping the IMF, the World Bank and the USA.

    Our boys are coming home from overseas wars to find no jobs, and often end up in soup lines, deranged.

    Yes, tell me about the virtues of tight money.

  7. Gravatar of Indy Indy
    13. July 2011 at 10:07

    Called it. Oh, and an additional element of cover for QE3 to my previous comment will be “Return to Unsustainable Trends in the Trade Deficit”.

  8. Gravatar of Scott Sumner Scott Sumner
    13. July 2011 at 10:24

    W, Peden, Yep.

    Silas, Yep, it’s a good indicator of whether policy is on the right track.

    John, No those aren’t my views–see Beckworth’s reply below.

    Scott, You may be right.

    Thanks David.

    Benjamin, I hear you.

    Indy, Yes, you called it. But it’s not here yet.

  9. Gravatar of Silas Barta Silas Barta
    13. July 2011 at 10:27

    Silas, Yep, it’s a good indicator of whether policy is on the right track.

    So, if all the S&P 500s are nearing bankruptcy, and the Fed gives them enough free money (not loans, but free money or the equivalent) thereby propping up their prices, then the resulting rally is indicating that policy is “on the right track”?

    How would “propping up stock prices of zombie banks” show up?

  10. Gravatar of Why the Stock Market Loves Inflation « Uneasy Money Why the Stock Market Loves Inflation « Uneasy Money
    13. July 2011 at 10:49

    [...] Published July 13, 2011 Uncategorized Leave a Comment Scott Sumner just posted an item on his blog pointing out how the stock market rallied today when Ben Bernanke testified that the [...]

  11. Gravatar of Liberal Roman Liberal Roman
    13. July 2011 at 11:20

    “Something for the inflation hawks to think about.”

    Inflation hawks don’t really think. They believe. See Silas above.

  12. Gravatar of Lars Christensen Lars Christensen
    13. July 2011 at 11:41

    Scott, some in the market place is seeing this as a “Bernanke put” – and hence talk of inflationary risks and bubbles emerges once again. On the keynesian side they talk about “stimulus”. I, however, think that this constant back and forth on QE-X is a great problem in terms of fundamentally re-establishing monetary equilibrium in the US economy.

    What is needed is a clear RULE on some kind of nominal target. You and others have convinced me that a NGDP rule would be the preferable option. Or even better lets go for some kind of “automatic” rule based on market pricing. This is what we need to go for.

    Even though I think today’s comments from Bernanke are good news I would much have preferred that he had not need to make discretionary evaluations of income macroeconomic data as he seems to be doing now. Other than the obvious reasons for rules rather discretion stated by Kydland and Prescott and others I think there are practical political reasons for a rules based monetary policy. In the present situation we are going to have a political discussion about the need for more “stimulus” or the risk of inflation and bubbles every time Bernanke hints at possible policy changes. That would not be the case if an automatic market based rule had been in place to ensure equilibrium between money demand and money supply – then the adjustment would have happened completely automatically and in the same way as million of micro prices are adjusting every day without us having a discussion about that.

    PS please do not call it “stimulus” when the Fed moves to reestablish monetary equilibrium. To me “stimulus” is a Keynesian term that refers to activist monetary and fiscal policy. This is certainly not what we need.

    PPS for reference: I posted a similar comment on David Glasner’s exellent blog http://www.uneasymoney.com

  13. Gravatar of Gabe Gabe
    13. July 2011 at 11:50

    I think the monetarist on here are confused between inflation hawks and those who believe we should get rid of the Fed.

    Many who oppose the Fed are in agreement with Scott Sumner on what the Fed should do at this point…go ahead QE…see what happens. we know you want a robot controlled targeting of NGDP but you admit it won’t happen because of corrupt political players…yet you still advocate for this power to be held by the corrupt.

    Who is really stopping QE3?

    Ron Paul isn’t stopping it. Senator Shelby isn’t stopping you. Left wing politicians are not stopping you and right wing politicians aren’t stopping it.

    The monetary power brokers are merely toying with the little people…we are toys to be manipulated/lied to/experimented on and when the time comes…the insiders(tthe ones who don’t wnat to give up control to a targeting algorithm) are happy to front run us.

  14. Gravatar of Lars Christensen Lars Christensen
    13. July 2011 at 12:05

    Gabe, I am pretty sure that Scott Sumner is making a conditional argument. The Fed exists – given that fact what how should it then conduct monetary policy? I guess that is the question that Scott is answering.

    Personally I am in favour of moving to a Free Banking system – and I believe that it would more or less deliver what Scott is suggesting the Federal Reserve should do. But that discussion unfortunately at the moment seems rather theoretical.

  15. Gravatar of Cameron Cameron
    13. July 2011 at 12:25

    To all those skeptical of QE2′s impact on the real economy…

    http://monetarycrank.blogspot.com/2011/06/qe2-and-economy.html

  16. Gravatar of Scott Sumner Scott Sumner
    13. July 2011 at 13:12

    Silas, The Fed doesn’t give money away, they sell it for bonds.

    Lars, I agree we need a rule, I suppose I use “stimulus” because it’s easier to say than “more expansionary policy than what we have now.”

    Gabe, You said;

    “yet you still advocate for this power to be held by the corrupt.”

    Actually I favor taking that power away from the Fed.

    Thanks Cameron, But I still think the best way to evaluate the effect is to look at how rumors of QE2 affected market prices linked to inflation and real growth.

  17. Gravatar of Joe Joe
    13. July 2011 at 13:13

    Here’s a quote from Bloomberg…. “U.S. stocks pared gains, almost erasing a 164-point gain in the Dow Jones Industrial Average, after the Associated Press reported that House Speaker John Boehner said it’s a “crapshoot” whether the federal debt limit will be boosted if an agreement isn’t reached by Aug. 2.”

    Wow. Maybe markets really are efficient after all.

  18. Gravatar of Lars Christensen Lars Christensen
    13. July 2011 at 13:19

    Scott, I know its easier to say “stimulus”, but I believe the terminology we use is important for people perception of what we are advocating. You have never advocated keynesian style stimulus and I am pretty sure that if the composition of NGDP was 1% RGDP and 4% inflation you would not call for more “stimulus” – Krugman would.

    Cameron, I completely agree with Scott on this one. Expectations of QE2 was as important or rather more important than the actual policy implementation. Look at most of the “turning points” in the macro data. It happens PRIOR to the actual implementation. It would be interesting to see the same graphs using the turning point in TIPS inflation expectations. I am sure that would tell you Scott’s story…

  19. Gravatar of Silas Barta Silas Barta
    13. July 2011 at 14:02

    Silas, The Fed doesn’t give money away, they sell it for bonds.

    It was a hypothetical “unconventional” monetary policy I was suggesting for purposes of argument, showing that propping up the stock market is not the same as real prosperity.

    In any case, paying above market price for distressed assets (like MBSes) counts as giving money away, and the Fed has definitely done that.

  20. Gravatar of Cameron Cameron
    13. July 2011 at 14:05

    Scott,

    I agree, but that won’t convince those who see a disconnect between asset prices and the real economy.

    Lars,

    The period I show in the graphs started the date of the Jackson Hole speech (when Bernanke hinted at QE2) and ended during Bernanke’s first press conference (in which he effectively said QE2 would finish as scheduled). Those dates are unsurprisingly correlated with turning points in stock prices, long term yields, USD exchange rates, and inflation expectations. See here:

    http://monetarycrank.blogspot.com/2011/06/how-qe2s-announcement-and-premature-end.html

  21. Gravatar of W. Peden W. Peden
    13. July 2011 at 14:16

    Silas Barta,

    Propping up the stock-market is not the same as increasing prosperity. No-one has said that it is.

    On the other hand, if markets think that something is really stupid- like the Fed’s cancellation of QE- the markets are probably right. Or do you think that, on the basis of some economic theory, you could plan the economy better than the markets?

    Though I wouldn’t recommend it, didn’t the “Greenspan Put” usher in a period of exceptional monetary stability? Was that because central bankers had learnt how to plan the economy (unlikely, in my book) or because a central banker guided by some exogenous variable can make less mischief than if they are guided by some particular economic theory?

    And what would the driving force behind monetary policy be in a commodity standard system? Markets.

    If the Fed was the slave of the DJIA, it would still be undesirable, but it would be a lot better than what we’ve got right now.

  22. Gravatar of Scott Sumner Scott Sumner
    13. July 2011 at 14:28

    Joe, Good point.

    Lars, I see your point.

    Silas, So far the Fed’s made a big profit.

    Cameron, Unfortunately you are right, as I noted in the column “QE2 after 3 months”

  23. Gravatar of Lars Christensen Lars Christensen
    13. July 2011 at 15:03

    Cameron, Thx….good stuff. Very illustrative.

  24. Gravatar of marcus nunes marcus nunes
    13. July 2011 at 15:13

    Lars
    This post also illustrates those arguments:
    http://thefaintofheart.wordpress.com/2011/06/15/bits-pieces/

  25. Gravatar of Gabe Gabe
    13. July 2011 at 18:15

    Scott: Actually I favor taking that power away from the Fed.

    Gabe: That is great to hear! As the economy continues to falter it will be very intersting to read your blog.

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