Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like TRADE.com are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Bernanke Ponders The Financial Crisis Stock Market Plunge

Stock-Markets / Stock Markets 2012 Jun 25, 2012 - 10:26 AM GMT

By: Brady_Willett

Stock-Markets

Best Financial Markets Analysis ArticleThree months ago Ben Bernanke gave a series of lectures and defended the Fed’s actions during the financial crisis.   In what was tantamount to a post-crisis victory lap, Bernanke contended that “we did stop the meltdown”, and “we avoided what would have been, I think, a collapse of the global financial system.” These sentiments echoed similar self-congratulatory remarks made by Mr. Bernanke in 2011 and 2010.  For that matter, they mirrored those made by Bernanke as far back as August 2009:


“History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs. In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation...As severe as the economic impact has been, however, the outcome could have been decidedly worse. Unlike in the 1930s…” August 21, 2009. Bernanke

And yes, whenever Bernanke mentions the ‘1930s’ it is time to simply add yada, yada, yada...

But I Thought The Crisis Was Over?

Last week Bernanke announced a continuation of the Fed’s maturity extension program (or ‘operation twist’) and stressed that the Fed was ready to do more.  Nearly 5-years since the Fed’s first rate cut - and with the Fed unable to exit any major stimulus scheme - the committee is getting ready to launch QE3? 

“Interest rates are quite low…I think we can lower interest rates more” (and related quotes below) Bernanke.  Q&A June 19, 2012

Be it because of the lack of ‘transmission’ (of low interest rates into the economy) or the insistence by Bernanke that the Fed can do more, the Fed’s twist extension did not pack the psychological punch of previous stimulus schemes. In fact, reporters questioning Bernanke ignored the twist almost entirely, instead asking questions like: “if you expect inflation to remain under control and the jobs market is by all accounts weak, why doesn’t the Fed unleash another round of stimulus now?”

With reporters vying for clues on the ‘when’ (QE3) and Bernanke doing his best impression of Greenspan, the question of ‘what’ didn’t get much attention.  More Fed’ asset purchases may be around the corner, but what assets are to be purchased?

“Additional asset purchases would be among the things that we would consider if we need to take additional measures to strengthen the economy…”

“I wouldn’t accept the proposition that the Fed has no more ammunition.  I do think that our tools, while they are non standard, still can create more accommodative financial conditions…”
 
“We still do have considerable scope to do more and we are prepared to do more…”

“We are prepared to do more…each of these non standard programs does have various costs and risks associated with it…”

“the types of unconventional programs that are available are, um…we know less about them, they have various costs and risks”


Are Equities Next?

QE1 and QE2 were successful, at least in the Fed’s mind, because these programs had a positive impact on asset prices (i.e. stocks and real estate).  If a short term rise in asset prices measures success, logic dictates that falling asset prices are an indication of failure. For example, what if the S&P 500 falls below the level it was at prior to QE2 before the Fed can start its exit strategy?  Doesn’t the Fed parroting ‘things would have been worse if we didn’t print’ lose all meaning if things get worse shortly after trillions of dollars are printed?  

“We think that…QE1 and QE2 did have significant effects on assets prices…”


Seemingly too simplistic, the reality is that stocks are one of the most important indicators to the Fed.  This is the case not only because stock prices provide an immediate indication of how Fed policy is being received by investors, but also because (by many accounts) stocks are the best ‘transmission mechanism’ when it comes to juicing the economy. Whereas record low interest rates have the potential to stimulate economy, rising stock prices absolutely increase household wealth (at least on paper).

Conclusions

“What the Federal Reserve is doing with the program we announced today…is we are taking longer-term debt off the market in order to induce investors to move into other assets…”

According to Fedthink, in order to be successful QE3 needs to ‘induce’ more investors into ‘other assets’.  Given that there are only two assets the Fed cares about – real estate and stocks – It is not difficult to envision an equity downturn that compels the Fed to enact a stock buying program.

“We are unlikely to do more maturity extension for awhile because we have taken that about as far as we can” June 19, 2012

As for the notion that Bernanke will refrain from stuffing the Fed’s already bloated balance sheet with equities for fear or causing a panic and/or because of the obvious absurdity of mirroring a Japanese-style intervention template Bernanke has heaped scorn on, remember to keep it simple: The Fed prints and asset prices rise.

“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. “ Bernanke Feb 3, 2011

What if you print trillions of dollars, keep short term interest rates at zero percent, and asset prices still do not listen?  If you are central banker thought by many as the authority on the Great Depression, you stop fretting over the irrational inaction of tone-deaf investors and instead ponder taking the plunge…


BWillett@fallstreet.com

By Brady Willett
FallStreet.com

FallStreet.com was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules