Life and Lemons

Confused with Mr Ben

I am currently forced by an academic authority to read the front page and business news, and while I love reading per se (in any form, from menu place mats to ingredient lists to subtitles and literature), the exercise only reminded me why I skip those sections of the paper every time — they scare the bejays out of me.

One of the things that confound me at the moment is the recently announced Quantitative Easing or QE3 by the US Federal Reserve, headed by Ben Bernanke. Basically, the country’s monetary policy authority will be injecting funds into the economy by buying $40 billion in mortgage bonds per month seemingly indefinitely, in efforts to boost employment. When asked how this policy will benefit the people, this is Mr Bernanke’s response:

‘…this is a Main Street policy, because what we’re about here is trying to get jobs going. We’re trying to create more employment. We’re trying to meet our maximum employment mandate, so that’s the objective. Our tools involve – I mean, the tools we have involve affecting financial asset prices, and that’s – those are the tools of monetary policy.

ย ‘There are a number of different channels – mortgage rates, I mentioned other interest rates, corporate bond rates, but also the prices of various assets, like, for example, the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier, they’ll feel more – more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they’ll, you know, make a better return on that purchase. So house prices is one vehicle.

‘Stock prices – many people own stocks directly or indirectly. The issue here is whether or not improving asset prices generally will make people more willing to spend.

‘One of the main concerns that firms have is there’s not enough demand. There are not enough people coming and demanding their products. And if people feel that their financial situation is better because their 401(k) looks better or for whatever reason – their house is worth more – they’re more willing to go out and spend, and that’s going to provide the demand that firms need in order to be willing to hire and to invest.”

I am merely an economist by degree but not by profession or practice. So I have absolutely no credit to speak of the matter. There was just an itch about this that bothers me, caused by my reading (my apparent downfall) this articleย http://www.dailyreckoning.com.au/be-very-very-scared/2012/09/14/.ย It just seems that the Fed is banking on market speculation and nothing else to save their economy. And I, as an economics student, is pushed to ask: What of market forces? What of economic fundamentals? Call me bookish and juvenile, but you would think that in any decision, in any situation, that fundamentals would matter.

The US stock market rallied last Friday. I guess we will see in the next few weeks if the markets will realize the hopes of the Fed, or if they will see all these as mere fairy dust. I vote for fairy dust.

Bow.

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