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Wednesday, November 03, 2010 9:42 PM


Bernanke Admits Targeting Stock Prices


Everyone knew the Fed was attempting to lift stock prices. Today Bernanke admitted it. Please consider Bernanke Says New Purchases Should Aid Growth With Lower Rates

Federal Reserve Chairman Ben S. Bernanke said resuming large-scale asset purchases should boost economic growth through lower borrowing costs and higher stock prices and that concerns about the strategy are “overstated.”

“This approach eased financial conditions in the past and, so far, looks to be effective again,” Bernanke said today in an opinion article for the Washington Post released hours after the Fed announced the $600 billion of Treasury buying through June in a second round of unconventional monetary stimulus.

“Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action,” Bernanke said. “Easier financial conditions will promote economic growth.”

Bernanke said that low and falling inflation indicates that the economy has many idle resources and that further monetary policy efforts will not cause the economy to overheat.
Overheat Where?

It might not cause our economy to overheat, but it is creating one big mess for emerging markets such as Brazil. Money is pouring in as the dollar sinks. Inflation in China is massive.

What the Fed Did and Why

Inquiring minds may wish to read Ben Bernanke's Washington Post Op-Ed What the Fed did and why: supporting the recovery and sustaining price stability.

Here are a few snips...
Notwithstanding the progress that has been made, when the Fed's monetary policymaking committee - the Federal Open Market Committee (FOMC) - met this week to review the economic situation, we could hardly be satisfied. The Federal Reserve's objectives - its dual mandate, set by Congress - are to promote a high level of employment and low, stable inflation. Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10 percent, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer. The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills.

Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. Although low inflation is generally good, inflation that is too low can pose risks to the economy - especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation.

With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.

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. ....

The Federal Reserve cannot solve all the economy's problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector. But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.
Effective Again? In What Way?

There has been little job creation, no increase in R&D, no increase in bank lending. The only case for stating "effective again" (before round II even started I might add) is stock prices, commodity prices and junk bonds are all up.

How long can that last with no benefit to the real economy?

Federal Reserve Cannot Solve Any Problems

Bernanke said the Federal Reserve cannot solve all the problems on its own. More realistically, the Fed cannot solve ANY problems on its own (or for that matter with the help of anyone else).

The problem is "The Fed is the Problem"

The Bernanke and Greenspan Fed have blown one bubble after another. Now the Fed is openly pursuing another bubble in stocks.

However, the credit bubble and housing bubbles are bubbles of last resort. Both created jobs (artificially of course), then we crashed and the jobs vanished.

Fresh new bubbles in stocks, junk bonds, or commodities will not create any jobs.

In fact, rising commodity prices based on speculation and misguided attempts to force the CPI higher will cost jobs. The reason is so obvious that only a monetary crank trapped in academic wonderland cannot see it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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