You can’t make this stuff up

The Bernanke rally lasts about 4 hours:

NEW YORK (AP) — Comments from Fed Chairman Ben Bernanke set off a stock market rally early Wednesday, but it wasn’t long before another Fed official helped cut it short.

In testimony before Congress, Bernanke said the central bank would be open to new economic stimulus measures, but only if the economy gets much worse. The remarks were far from a promise for more Fed action, but markets reacted immediately nonetheless. The Dow Jones industrial average jumped as many as 164 points, or 1.3 percent.

Most of those gains evaporated later in the day after Federal Reserve Bank of Dallas President Richard Fisher said in a speech that the Fed had already “pressed the limits of monetary policy.”

I wonder what it feels like to be able to destroy several hundred billion dollars in wealth (worldwide) by just opening your mouth.


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21 Responses to “You can’t make this stuff up”

  1. Gravatar of Mike Sandifer Mike Sandifer
    13. July 2011 at 18:38

    I really wonder why a strong move wasn’t made to get rid of the filibuster in early 2009, and then a ramming through of Obama’s programs and nominees, including those to the FOMC. It seems to me this has all been badly handled.

    Because, in that case, maybe the Democrats could do something more about monetary policy legislatively, if they’d ever have the incite and will. When the economy is languishing with low inflation and under-utilized capacity, I see nothing wrong with Congress and/or the President taking action to clean house at the central bank, or change it’s structure, mandate, etc.

  2. Gravatar of Mike Sandifer Mike Sandifer
    13. July 2011 at 18:39

    insight, that is

  3. Gravatar of Mike Sandifer Mike Sandifer
    13. July 2011 at 18:42

    This raises a question in my mind: Why do we even have committees running central bank policy? Yes, at the Fed appointments are staggered, helping reduce the influence of politicians on FOMC members, but maybe it’d be better to have one person responsible.

  4. Gravatar of John John
    13. July 2011 at 18:52

    Blaming Richard Fisher for “destroying wealth” sure is a funny way of looking at things. Markets bounce around all the time on all kinds of news, odds are very high that the market would have pulled back eventually whether he talked or not. It could be that some speculators tried to ride our the Bernanke statement bounce then sold at the top.

  5. Gravatar of David Pearson David Pearson
    13. July 2011 at 19:02

    Fisher’s views are hardly news to the markets.

    We had a ho-hum two-day market reaction to the Fed’s QE3 signals. There are several plausible explanations for this. One of them is that the prospect of additional QE was insufficient to overcome negative factors (European ratings downgrades, lack of jobs growth, etc). A second is that the market may have already discounted QE3. After all, it is trading near recent highs despite all the negative news. If this is the case, why give much validity to event studies? Third, Bernanke is signaling he will only act when the economy weakens further. This is less than encouraging to markets. Its as if he is offering a 3-3.5% NGDP “floor” rather than a 5% target.

    IMO, all three explanations were at work.

  6. Gravatar of Doc Merlin Doc Merlin
    13. July 2011 at 19:36

    Gold had a large rally though, and it didn’t lose the gains later.

  7. Gravatar of David Pearson David Pearson
    13. July 2011 at 21:28

    Gold not only rallied, but broke out to an all time high. Further QE means real interest rates will be negative for some time to come. Gold bull markets correlate most with prolonged periods of negative real rates.

    BTW, China has negative real deposit rates despite several rate increases (i.e. the PBOC is behind the curve). Last Saturday’s inflation surprise there drove the latest spike in gold. Chinese savers likely choose gold as an alternative to losing purchasing power in bank deposits. This is the “Occam’s Razor” explanation for the surge in China gold purchases.

  8. Gravatar of Tom Grey Tom Grey
    13. July 2011 at 22:53

    If the US gov’t continues to spend too much, and in borrowing weakens the USD, other countries will reduce their demand for inflating value-losing USD. With the Euro a mess, and the Chinese Renmimbi (Yuan?) controlled by an unfree gov’t, there is no good alternative reserve currency.
    Gold is not bad.
    Unlike oil, going up and down widly, yearly, gold’s up (and sometime down) moves will probably be slower. Gold’s up is partly irrational exuberance, but also conservatively rational “where else?” Similar to the internet bubble — but is the similar gold time 1996 or 1999?
    Nobody knows, tho most think there will be a big gold correction, some 20-40% drop in a month or so, “sometime”.

    Financial investment/ speculation values change frequently. It’s not fair to claim that any particular “down” move is “caused” by any particular comments. But making such claims serves as a critique to those who make realistic comments, encouraging a false optimism-only comment policy.
    Scott, you do realize you’re asking for such (self) censorship.

  9. Gravatar of W. Peden W. Peden
    14. July 2011 at 01:47

    I don’t see anything realistic about the claim that the Fed has pressed the limits of monetary policy. It’s no more “realistic” a claim than it was back in early 2010.

  10. Gravatar of Lorenzo from Oz Lorenzo from Oz
    14. July 2011 at 01:52

    Zimbabwe showed where the “limits of monetary policy are”. Somewhere in the stratosphere, metaphorically speaking. The limits of where you want to go are not the limits of where you can go, but it can be useful to claim that they are.

  11. Gravatar of Jason Odegaard Jason Odegaard
    14. July 2011 at 02:14

    While being questioned by Rep. Sean Duffy, Ben Bernanke replied to a question on whether the Fed was printing money,

    “We create reserves in the banking system which are just held with the Fed, it does not go out into the public.”

    Was he just guarding his words since he was speaking to a member of Congress who would likely oppose QE? Or is it the IOR that essentially prevents the reserves from leaving the Fed?

  12. Gravatar of Scott Sumner Scott Sumner
    14. July 2011 at 04:31

    Mike, I’d also like to get rid of the filibuster, but Obama’s to blame for those empty seats–he didn’t even nominate anyone for almost 18 months. When he did, 2 sailed right through.

    John, That’s wrong, but I probably should do a post to explain why. The EMH says any change in stock prices is expected to be permanent. It will bounce around in the future, but from a level several hundred billion lower than if he hadn’t made those foolish statements.

    David;

    “Fisher’s views are hardly news to the markets.

    We had a ho-hum two-day market reaction to the Fed’s QE3 signals. There are several plausible explanations for this.”

    The premise of your comment is wrong. His comments (the fact he made them) were news to the markets, that’s why they reacted.

    I agree with the rest of your comment.

    Doc Merlin, Gold moves for many reasons.

    Tom, You said;

    “It’s not fair to claim that any particular “down” move is “caused” by any particular comments.”

    This is bizarre. If the market moves strongly right after an important Bernanke statement, why shouldn’t I talk about it?

    W. Peden and Lorenzo, I agree.

    Jason, The IOR is one factor that leads to high reserve demand, the other is low nominal rates on T-bills. The Fed isn’t printing money is the sense of printing dollar bills (at least to any unusual extent.)

  13. Gravatar of David Pearson David Pearson
    14. July 2011 at 05:46

    Scott,

    Fisher is auditioning for the Chairman’s job should Obama be a one-termer. The worst the economy gets, the more vocal that audition becomes. If you think you don’t like Fed policy now…

    No one would be surprised at a Fisher dissent on a QE3 package.

  14. Gravatar of Gabe Gabe
    14. July 2011 at 06:30

    “I wonder what it feels like to be able to destroy several hundred billion dollars in wealth (worldwide) by just opening your mouth.”

    It depends on who you are. If you are power hungry meglomaniac then it is the most exhilerating feeling in the world. If you are humble person who believes in no free lunches and a theory that all should be equal before the law then it is probably a huge burden.

    Guess which type of person seeks the power of which you speak?

  15. Gravatar of What Bernanke Giveth, Fisher Taketh Away « Uneasy Money What Bernanke Giveth, Fisher Taketh Away « Uneasy Money
    14. July 2011 at 06:49

    […] It’s fun to bat clean-up behind Scott Sumner in the line-up. He just posted this news item on his blog: […]

  16. Gravatar of Scott Sumner Scott Sumner
    14. July 2011 at 07:36

    David, Say it ain’t so, that would be a disaster. I think Taylor is more likely.

    Gabe, I see your point.

  17. Gravatar of Morgan Warstler Morgan Warstler
    14. July 2011 at 10:15

    When Perry wins the Presidency, Fisher looks good.

    But then AFTER a Republican is president, the rules the Fed follows change dramatically.

  18. Gravatar of anon anon
    14. July 2011 at 10:21

    In his Congress testimony, Bernanke has come against fiscal austerity, stating:

    “I only ask … as Congress looks at the timing and composition of its changes to the budget, that it does take into account that in the very near term the recovery is still rather fragile, and that sharp and excessive cuts in the very short term would be potentially damaging to that recovery…” (HT: Brad De Long)

    This is very puzzling to me. Is he saying that the Fed is unable to offset an AD shortfall caused by fiscal austerity? Or is he saying that poorly planned cuts (due to e.g. debt ceiling issues) could damage the supply side? I’m assuming the latter, but it’s hard to tell.

  19. Gravatar of Full Employment Hawk Full Employment Hawk
    14. July 2011 at 15:22

    This once again shows that monetary policy is too important to be left to the bankers. Currently half of the membership of the FOMC is made up by people largely chosen by bankers, who therefore represent the interests of bankers, and only half by people chosen by the President and confirmed by Congress, who therefore represent the public interest. Since it is clear that the Republicans in the Senate will prevent President Obama from filling the vacancies on the BOG with anybody who takes the Fed’s mandate to achieve maximum employment seriously, this situation will not change unless Obama finds a way to make recess appointments and is willing to do so. Since the Obama administration has shown no urgency in filling the vacancies, this is not likely to happen.

    An independent central bank is consistent with the principles on which a representative democracy is based ONLY if the people making the decisions are ultimately responsible to the elected representatives of the people. Since the Constitution gives Congress the authority to print money and regulate the value thereof, the current make up of the FOMC is of very doubtful constitutionality.

    The FOMC is also required to abide by the Congressional mandate to achieve maximum employment, which it is in blatent, gross violation of. WHERE IS THE OUTRAGE?

    Maximum employment, it’s not just a good idea, IT’S THE LAW!

  20. Gravatar of Full Employment Hawk Full Employment Hawk
    14. July 2011 at 15:29

    “I really wonder why a strong move wasn’t made to get rid of the filibuster in early 2009”

    Because President Obama came to Washington with the fatal delusion that he could work together with the Republicans in a bipartisan manner to solve the Nation’s problems. Unfortunately for him the Republicans had and have no intentions of doing this. Their overriding objective has been, and is, to make him fail so that he can be defeated. Keeping him from filling the vacancies on the BOG with people who take the Fed’s Congressional mandate to achieve maximum employment seriously is one aspect of that strategy. The failure of the Obama administration to promptly fill the vacancies with such people while it was doable was a tremendous blunder which may well cost Obama the reelection.

  21. Gravatar of Scott Sumner Scott Sumner
    15. July 2011 at 09:45

    Morgan, Yeah, we need another arrogant Texan. Bush did such a great job.

    anon, I did a newer post on that.

    FEH, I agree about keeping bankers out of the Fed

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