Tag Archives: Ben Bernanke

The Stock Market And Its “Wealth Effect”

On February 18 I wrote a post concerning Alan Greenspan’s comments regarding the stock market “as a stimulus.”

In this post, I would like to highlight comments made by Federal Reserve officials (Bernanke and Sack) as well as another made by Greenspan, as I believe that these official comments regarding the stock market’s “wealth effect” and related themes deserve recognition and scrutiny.

From Bernanke’s November 4 Washington Post Op-ed “What the Fed Did and Why…”, in which he is commenting upon the Fed’s plans to buy $600 Billion in long-term Treasuries (i.e. QE2):

“This approach 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. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

From Brian Sack of the New York Fed, in an October 4 speech titled “Managing The Federal Reserve’s Balance Sheet” :

“Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.”

From Alan Greenspan’s “Activism.” (pdf) :

“Equity values, in my experience, have been an underappreciated force driving market economies. Only in recent years has their impact been recognized in terms of ‘wealth effects’. This is one form of stimulus that does not require increased debt to fund it. I suspect that equity prices, whether they go up or down from here, will be a major component, along with the degree of activist government, in shaping the U.S. and world economy in the years immediately ahead.”

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My comments:

I could write extensively about this collection of comments.  For now, I will say that until recently, the idea of prominent Federal Reserve officials publicly talking of the stock market as an instrument for creating a “wealth effect” would have seemed rather foreign.  I see considerable peril, for a variety of reasons, in having officials make these types of comments.

Can an asset class such as the stock market be reliably counted upon as a means unto itself to create sustainable, broad-based wealth?  Especially if, as I believe, the stock market is currently a bubble?  I think we should reflect upon our (national) experience in housing before answering this question.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1313.80 as this post is written

 

Ben Bernanke’s Speech And Q&A On February 3, 2011

I could comment extensively on Ben Bernanke’s speech and Q&A at the National Press Club yesterday, as I partially and fully disagree on many of the comments he made.  I find it unfortunate that official transcripts of this and previous Q&A sessions are not available.  (speech video and transcript;  Q&A video and partial transcript)

One aspect that I would like to briefly comment upon is that of the success of QE2.   Quantitative Easing’s primary goal is to lower interest rates.  However, during QE1 and (to date) QE2, interest rates have risen, not declined, since the program was begun.  This is highly important and notable, yet doesn’t receive proper recognition.  It begs the question as to whether QE1 and QE2 are failed interventions.

Proponents of QE2 claim that it is “working” or is “effective” as the stock market is rising, GDP is rising, or use a variety of other arguments to justify the program.  However, that does nothing to change the fact that interest rates have risen, not declined, under QE2 (and QE1).

This passage from yesterday’s speech is notable with regard to the above:

“Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases. All of these developments are what one would expect to see when monetary policy becomes more accommodative, whether through conventional or less conventional means. Interestingly, these developments are also remarkably similar to those that occurred during the earlier episode of policy easing, notably in the months following our March 2009 announcement of a significant expansion in securities purchases. The fact that financial markets responded in very similar ways to each of these policy actions lends credence to the view that these actions had the expected effects on markets and are thereby providing significant support to job creation and the economy.”

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A Special Note concerning our economic situation is found here

SPX at 1307.10 as this post is written

The Wealth Disparity

In his “60 Minutes” interview of Sunday (which I commented upon in the last post), Ben Bernanke responded to  a question (from Scott Pelley) regarding the wealth disparity:

Pelley: The gap between rich and poor in this country has never been greater. In fact, we have the biggest income disparity gap of any industrialized country in the world. And I wonder where you think that’s taking America.

Bernanke: It’s a very bad development. It’s creating two societies. And it’s based very much, I think, on educational differences. The unemployment rate we’ve been talking about. If you’re a college graduate, unemployment is five percent. If you’re a high school graduate, it’s ten percent or more. It’s a very big difference. It leads to an unequal society and a society which doesn’t have the cohesion that we’d like to see.

I think this response from Bernanke is notable for many reasons, one of which that it seems that policy makers rarely mention the wealth disparity.

In his response, Bernanke cites educational differences as the primary cause of the wealth disparity, and as support of this argument states unemployment statistics.  For a variety of reasons I think that his reasoning in this response is flawed.  However, if one does generally agree that a better level of education is (increasingly) required for wealth attainment, that in itself is problematical.  It is hard to envision quick and dramatic increases in the quality of education in this country – such increases could take years.  As well, the dramatic increases in the cost of education (especially for undergraduate and advanced degrees) is a major hurdle to a widespread increase in the educational level.  Any increases in education should be viewed relative to that being attained by other countries on a global scale.

I strongly believe that the wealth disparity is a very important topic, especially at this juncture.  Aside from “societal issues” such as that of fairness, I believe that a sustainable economy cannot coexist with an ever-growing wealth disparity.  It has been disconcerting that no policy maker, to my knowledge, has offered any substantive plan to address this ever-growing wealth disparity.  This is the type of glaring, continually unaddressed problem that I discussed in my article “America’s Economic Future – ‘Greenfield’ or ‘Brownfield’?”

As well, there is an issue of standard of living for the vast majority of American citizens outside of the upper income and wealth levels.  The long-term growth in Real Median Family Income (which I discussed in the September 20, 2010 post) has been, at best, anemic.  If one assumes a continual slow-growth economy (the current consensus among economists and other market professionals) there would appear little reason for this Real Median Family Income level to suddenly materially increase.  If one assumes a less-favorable economic future, this Real Median Family Income could be ravaged by a variety of factors such as a less favorable employment environment and inflation/deflation effects.

A Special Note concerning our economic situation is found here

SPX at 1226.48 as this post is written

Ben Bernanke’s December 5 2010 “60 Minutes” Interview – Comments

Ben Bernanke gave his second interview to “60 Minutes” last night.

This interview is very notable in many respects.  I could make extensive comments on various aspects of the interview, as I continue to have vast differences of opinion with many of Ben Bernanke’s stated comments and analyses.   For now I will make some brief comments on various excerpts from the transcript.  (My previous blog posts on Ben Bernanke can be found under the “Ben Bernanke” category.)

Perhaps the first thing to catch my attention was the following introductory comment by Scott Pelley:  “Bernanke feels he has to speak out because he believes his critics may not understand how much trouble the economy is in.”

Other notable exchanges between Pelley and Bernanke include (with my comments, if any, prefaced in italics):

Pelley: Some people think the $600 billion is a terrible idea.

Bernanke: Well, I know some people think that but what they are doing is they’re looking at some of the risks and uncertainties with doing this policy action but what I think they’re not doing is looking at the risk of not acting.

my comment: This “risk of not acting” is a familiar refrain from those who support intervention efforts…

Bernanke (with regard to QE2):  “What we’re doing is lowing interest rates by buying Treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster.

my comment: I think what Ben Bernanke meant to say is that he hopes to lower rates by buying Treasury securities.

Pelley: Can you act quickly enough to prevent inflation from getting out of control?

Bernanke: We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.

Pelley: You have what degree of confidence in your ability to control this?

Bernanke: One hundred percent.

my comment:  One of the most dangerous aspects of QE2 is that we (as a nation) don’t appear to have a proper understanding and respect for the risks inherent in such an intervention.  I think it is very unfortunate that most people seem (solely) fixated on possible inflationary implications.  This fixation seems to preclude discussions of many other risks, which I have mentioned in other posts such as that of November 5.  Also, while Ben Bernanke may be able to “raise interest rates in 15 minutes” that is not to say that doing so would be “painless” or not “highly disruptive” to the markets and economy – especially if raising the interest rate is done under (seemingly) urgent necessity.

Pelley: How would you rate the likelihood of dipping into recession again?

Bernanke: It doesn’t seem likely that we’ll have a double dip recession. And that’s because, among other things, some of the most cyclical parts of the economy, like housing, for example, are already very weak. And they can’t get much weaker. And so another decline is relatively unlikely. Now, that being said, I think a very high unemployment rate for a protracted period of time, which makes consumers, households less confident, more worried about the future, I think that’s the primary source of risk that we might have another slowdown in the economy.

Pelley: You seem to be saying that the recovery that we’re experiencing now is not self-sustaining.

Bernanke: It may not be. It’s very close to the border. It takes about two and a half percent growth just to keep unemployment stable. And that’s about what we’re getting. We’re not very far from the level where the economy is not self-sustaining.

my comments:  First, the idea that housing “can’t get much weaker” is incorrect.  My latest post on the potential downside of the housing market was on October 24.  Second, It is interesting to hear Ben Bernanke make these comments about sustainability of this recovery.  One of the main tenets of this blog is that the (purported) “economic recovery” we are currently experiencing is inherently unsustainable.  I have elaborated upon this topic here.

Pelley: Is there anything that you wish you’d done differently over these last two and a half years or so?

Bernanke: Well, I wish I’d been omniscient and seen the crisis coming, the way you asked me about, I didn’t. But it was a very, very difficult situation. And the Federal Reserve responded very aggressively, very proactively.

my comment:  This is a very candid assessment by Bernanke.  He is correct in his assessment that it was “a very, very difficult situation.”  The question arises as to whether this failure to see the first crisis coming will be extended to that of the next crisis.  I believe that, unfortunately, it will (and has).  Perhaps the foremost characteristic of our current and future economic situation is that of vast complexity.  Also, with regard to the comment that “the Federal Reserve responded very aggressively, very proactively” – this is largely irrefutable; however, the main question should be whether the actions were correct both from a short-term and long-term perspective.  I discuss this concept in a January 18 2009 article about interventions.

A Special Note concerning our economic situation is found here

SPX at 1224.71 as this post is written

Nassim Taleb Quote On Bernanke

In the November 22 – November 28 Bloomberg BusinessWeek, p23, Nassim Taleb is quoted as saying the following, which I find interesting:

“Bernanke is someone who talks about returns without talking about risk.  It’s identical to a pilot who talks about speed but not about safety.  The measures he is using may work, but should they fail, the risks are humongous.”

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A Special Note concerning our economic situation is found here

SPX at 1187.76 as this post is written

Ben Bernanke November 6, 2010 Remarks On QE2

On Saturday (November 6) Ben Bernanke took part in a panel discussion.  This was part of The Federal Reserve conference “A Return to Jekyll Island: The Origins, History, and Future of the Federal Reserve.”

I found these comments, pertaining to QE2, to be highly notable:

Ben Bernanke:

“There is not really, in my mind, as much discontinuity as people think.  This sense out there, that quantitative easing or asset purchases, is some completely far removed, strange kind of thing and we have no idea what the hell is going to happen, and it’s just an unanticipated, unpredictable policy – quite the contrary.  This is just monetary policy.”

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A Special Note concerning our economic situation is found here

SPX at 1213.40 as this post is written

Ben Bernanke On QE2

Ben Bernanke wrote an op-ed in The Washington Post yesterday titled, “What the Fed did and why: supporting the recovery and sustaining price stability.”

I could write very extensively about this piece as it is highly notable on several fronts.  For now, I will limit my comments.

My analysis indicates that the risks of QE lack recognition.  As well, the benefits appear highly overstated.  As such, we (as a nation) appear to have a mistaken understanding of the risk-reward ratio of large-scale QE.  This is especially problematical as I expect additional large-scale QE will be done in the future.  This belief is echoed by other prominent parties.

What I find interesting about Bernanke’s (and other Fed members’) comments about QE is that they seem very limited in discussing risks of QE.  This begs the question as to whether Fed members don’t think there is much risk in QE.  From what I have seen, the main risk Fed members have discussed is money supply issues / future inflation as well as the ability to gracefully (i.e. non-disruptively) exit such QE efforts.  Bernanke briefly mentions both of these items in his above-mentioned Washington Post op-ed.

However, I view those risks as being only two among a multitude of others.  As I wrote in the August 13 post, “There are an array of risks embedded in such QE efforts.”  In that post I discuss QE risks to the U.S. Dollar and QE’s role in fostering asset bubbles.

Another risk that receives little recognition is the risks embedded in the ever-increasing size of the Fed’s portfolio.   This is a very complex potential risk, entailing both large potential capital losses (driven in large part by rising interest rates) as well as other unintended (negative) consequences.  The potential capital losses aspect is well-documented in a Wall Street Journal editorial of today titled “High Rollers at the Fed.”

Both of these risks, as well as the multitude others, will only grow in importance if, as I suspect, additional (over and above Wednesday’s $600B announcement) large QE is performed in the future.

A Special Note concerning our economic situation is found here

SPX at 1222.43 as this post is written

Thomas Hoenig Story

The September 27-October 3 2010 issue of Bloomberg BusinessWeek has an interesting story titled “Thomas Hoenig is Fed Up.”

The story chronicles various views of Thomas Hoenig and how these views differ from those of others prominent within The Federal Reserve.

I found one line, referring to Hoenig’s views, particularly noteworthy given current (and likely future) Federal Reserve policies and reactions to them:

“The hard truth, in his view, is that there just isn’t much more the Fed can do to help, and we all ought to admit that.”

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A Special Note concerning our economic situation is found here

SPX at 1165.15 as this post is written

Allan Meltzer Comment On “What Should the Federal Reserve Do Next?”

On September 9 The Wall Street Journal had various people respond to the question of “What Should the Federal Reserve Do Next?”

Among the various responses, I found this excerpt from Allan Meltzer’s response to be most interesting:

“In “A History of the Federal Reserve,” I concluded that the principal mistakes the Fed has made have resulted from giving excessive attention to current events and forecasts of highly uncertain near-term developments. By focusing on the short-term, the Fed neglects the longer-term consequences of its actions. The transcripts of FOMC show that the members are paying little attention to medium- and longer-term consequences.”

A Special Note concerning our economic situation is found here

SPX at 1109.55 as this post is written

Ben Bernanke’s Comments On The Current Economic Forecast

I found Ben Bernanke’s comments on the economic outlook, given last Wednesday (June 9), to be interesting.

Here are some excerpts, as published in this Wall Street Journal article of June 10:

“Federal Reserve Chairman Ben Bernanke offered guarded reassurances about the economy in testimony to the House Budget Committee Wednesday, saying a new recession is unlikely and that the Fed still expects the U.S. economy to grow at a 3.5% annual rate in the months ahead.”

also:

“”Forecasting is very difficult and I make no promises in any particular direction,” he said, “but it appears to us that the recovery has made an important transition from being supported primarily by inventory dynamics and by fiscal policy toward a recovery being led more by private final demand.” Still, he added, a double-dip recession couldn’t be “entirely ruled out.””

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SPX at 1089.63 as this post is written