Monday, December 1, 2008

Bernanke comments at Austin Chamber of Commerce

Some of his comments below and my remarks in blue.

"Even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time," he said.

Need a large fiscal stimulus to resolve this. Larger tax rebate checks, suspension of the payroll tax, etc. Large and ongoing until the economy improves.

In his speech, Bernanke noted that the bracing impact of the Fed's aggressive rate reductions has been somewhat stymied by the worst credit and financial crises to hit the world economy since the 1930s. Despite lower borrowing costs ordered by the Fed, skittish banks have been reluctant to lend money to people and businesses, a vicious cycle that has seriously hobbled the U.S. economy.

The Great Depression finally ended for the U.S. when spending ramped up dramatically for the war effort. Most of the rest of the world pulled out of the depression before the U.S. because they adhered to a strict, Keynesian policy approach.

"Although further reductions ... are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited," Bernanke said in the speech. The Fed can lower its key rate only so far — to zero — and it's getting ever closer to that threshold.

Bernanke said there are other ways that the Fed might bolster economic activity.

The Fed, for instance, could buy longer-term Treasury or agency securities on the open market in substantial quantities, he said. This might lower rates on these securities, "thus helping to spur aggregate demand," Bernanke said.

Lower long-term rates still may not spur aggregate demand. Sharply higher levels of gov't spending will. A better approach at this point would be if the Fed bought stock index futures to boost the stock market. This would be a very effective transmission mechanism and there would be almost an immediate, positive wealth effect to households. Japan did this in 2002-2004 and it worked, however, the buying was limited to bank shares. Imagine the effect if the Fed put $615 billion into the purchase of S&P futures! Sound crazy? Just remember, that's what they gave to foreign central banks--all in the space of two months!


Billy said...

Apple finally posted - Monday Afternon Mike hosting the Daniel Frishberg show on 11/28. If you are at the itunes store type Frishberg or Biz Radio in the search box and the Money Man report - Daniel Frishberg should come up under podcasts. Mike hosted all the segments on 11/28.


Jeff said...


The day the government starts manipulating the stock market is the day I never buy another share! This is notwithstanding rumors of the "Plunge Protection Team", President's Working Group on Financial Markets already having done so. This would also be illegal, according to the Wikipedia article. Of course, if you look at the blatant subsidization of bad management, most recently exhibited in the Citi bailout and on the way with the car makers, you could go ahead and say it's already happened. Keep up the good work!