What Bernanke Giveth, Fisher Taketh Away

It’s fun to bat clean-up behind Scott Sumner in the line-up. He just posted this news item on his blog:

NEW YORK (AP) — Comments from Fed Chairman Ben Bernanke set off a stock market rally early Wednesday, but it wasn’t long before another Fed official helped cut it short.

In testimony before Congress, Bernanke said the central bank would be open to new economic stimulus measures, but only if the economy gets much worse. The remarks were far from a promise for more Fed action, but markets reacted immediately nonetheless. The Dow Jones industrial average jumped as many as 164 points, or 1.3 percent.

Most of those gains evaporated later in the day after Federal Reserve Bank of Dallas President Richard Fisher said in a speech that the Fed had already “pressed the limits of monetary policy.”

Then Scott added this comment:

I wonder what it feels like to be able to destroy several hundred billion dollars in wealth (worldwide) by just opening your mouth.

One of the commenters wrote:

Blaming Richard Fisher for “destroying wealth” sure is a funny way of looking at things. Markets bounce around all the time on all kinds of news, odds are very high that the market would have pulled back eventually whether he talked or not. It could be that some speculators tried to ride out the Bernanke statement bounce then sold at the top.

In my post yesterday, I quoted from the Bloomberg item on the “Bernanke rally,” noting that the yield on the 10-year Treasury had risen, along with the stock market, from 2.88 to 2.95. By the end of the day, the yield had fallen back to 2.88.

Was it just coincidence that the yield on the 10-year Treasury and the S&P 500 were moving in sync? I don’t think so. Nor do I think that the timing of the turning point yesterday was unrelated to Fisher’s comment. Last September, after Bernanke first signaled a second round of quantitative easing, the stock market did not really start to move strongly upward until James Bullard, President of the St. Louis Fed, and William Dudley, President of the New York Fed, publicly endorsed QE2. Unfortunately, Bullard, head of that bastion of Chicago-School Monetarism in St. Louis, seems to have switched sides.

13 Responses to “What Bernanke Giveth, Fisher Taketh Away”


  1. 1 João Marcus Marinho Nunes July 14, 2011 at 11:21 am

    I call this “The Power of Words”. My standard example is to plot the daily S&P index from January 1961 to December 1963. During this period there were 4 major “events”: Bay of Pigs (04/61), the famous Kennedy speech against the Steel Industry (04/62), the Missile Crisis (10/62) and Kennedy´s assassination (11/63). To which event the stock market reacted persistenly?
    A: To the Kennedy speech, falling by more than 15% over the next 6 months!

  2. 2 JP Koning July 14, 2011 at 1:29 pm

    It’s always tough to attribute market reactions to actual events. We still don’t know what caused the 1929 or 1987 crashes, for instance. Working in markets has taught me that most moves in price must go unattributed, although the press – which always needs something to chatter about – would have it otherwise.

    But let’s say you’re correct. I don’t see Bernanke’s words creating hundreds of billions and Fisher’s words destroying them.

    I see Bernanke’s words reducing the market’s valuation of the unit of account by about 1%, and Fisher’s words “crying” the unit back up, so to say. In other words, the Bernanke-induced change in the market capitalization of the Dow, when adjusted for the decline in the purchasing power of the dollar, came to $0 (or thereabouts).

    So by blaming Fisher for destroying wealth, Sumner is suffering from some sort of money illusion (ironically the name of his blog).

    Incidentally, I am starting Currency and Credit by Hawtrey. Looking forward to it!

  3. 3 Lars Christensen July 14, 2011 at 3:53 pm

    David, be nice to the good people at St. Louis Fed;-) But I agree – the sound monetarist view can today be found at Richmond Fed rather in St. Louis. I am of course talking about the great Robert Hetzel.

    It seems like many US (and German for the matter…) monetarists have a hawkish bias that has nothing to do with monetarist tradition, theory or the empirical evidence on money. When I listen to Alan Meltzer these days I wonder whether it is the same economist who wrote a great book(s) on the history of the Fed. I don’t want them to be “dovish” – I just want them to acknowledge that traditional monetarist analysis indicates significant more deflationary risks than inflationary risks in the US economy

  4. 4 João Marcus Marinho Nunes July 14, 2011 at 4:20 pm

    Lars
    Send me an e-mail:
    joaomarcus.marinhonunes@gmail.com
    I have some “private exchange” to do with you.
    Cheers
    Marcus

  5. 5 David Glasner July 14, 2011 at 4:30 pm

    Marcus, Interesting point. I was in my early teens in the Kennedy administration, and I remember only vaguely his speech about the steel price increase. I remember that the stock market fell and that the decline was attributed to his speech, but what was so terrible about his speech?

    JP, I don’t think the evidence is strong enough for a jury to hold Fisher liable for damages to people who bought stocks based on Bernanke’s testimony. Nevertheless, I think that there is certainly a circumstantial basis for speculation. And that’s what we are here for, right? I am afraid that I have to take issue with your suggestion that the increase in stock prices yesterday, in response to Bernanke’s remarks, simply reflected a nominal change in valuation. If it was purely a nominal change, the valuation of the future unchanged real cash flows would have been discounted at a higher rate, so the present value is exactly the same. It’s because the expected REAL (please pardon the capitals) cash flows increased that the valuations increased DESPITE (sorry, I couldn’t help myself) the increased discount rate (yield on 10-year Treasuries rose from 2,88% to 2.95% while stock rose by 1%). Sorry, but Sumner (as usual) is right on this one. By all means, JP, please share your thoughts while or after you are working your way through Currency and Credit.

    Lars, Actually, I like Bullard. He was a contributor the volume I edited in the 1990s Business Cycles and Depressions: An Encyclopedia. He wrote an article on “Learning” which I thought was excellent. So some of my best friends are Monetarists.

  6. 6 João Marcus Marinho Nunes July 14, 2011 at 4:43 pm

    David
    This is the link to the You tube of the speech:

    You will notice that the speech was an “institutional brake”. Will the president now determine prices? Kennedy´s assassination, although tragic, had no institutional implications, given the Constitution.

  7. 7 Lars Christensen July 14, 2011 at 4:45 pm

    David, I have nothing against Bullard either – even though I think that St. Louis Fed basically have given up on monetarism – and instead advocates a hawkish version of New Keynesianism.

  8. 8 JP Koning July 15, 2011 at 1:54 pm

    David, I still think that what we observed two days ago was essentially a nominal change.

    After Bernanke spoke, the dollar fell about 1% versus all currencies. US equities rose by 1%.

    So a US equity holder could have sold their equities for USD cash right after Bernanke spoke (and before Fisher spoke) and realized a 1% return on the equity portfolio. But the USD cash which they now owned could only purchase 99% of what it would have purchased before Bernanke spoke (using the USD’s performance in currency markets as our metric). Net net, the US investor neither gained nor lost any purchasing power due to Bernanke.

    To put it differently, neither the Yen nor the Euro-denominated value of the Dow changed post-Bernanke/pre-Fisher.

  9. 9 David Glasner July 15, 2011 at 4:20 pm

    JP, I see your point, which I didn’t fully grasp when I made my comment yesterday. But I don’t think that my view has really changed. I still think that the change in stock valuation must reflect an expectation of increased real output. The adjustment in currency values, reflects a departure from PPP, so I would tend to discount it for purposes of macroanalysis. That’s my off-the-top of the head response after working most of the day on today’s new posting. So I could still change my mind.

  10. 10 Benjamin Cole July 16, 2011 at 10:38 pm

    Richard Fisher is an active menace to the economic prosperity of the USA. Please have him put somewhere where he can longer make pronouncements. Better yet, send him to Japan. They would appreciate his sentiments there.

  11. 11 Lawrence H. White July 26, 2011 at 7:21 pm

    David, the St. Louis Fed is no longer a bastion of Monetarism. I count only three remaining monetarists (David Wheelock, Dan Thornton, and Bill Gavin) now that Bob Rasche has retired as director of research. Jim Bullard is not a Monetarist, but more in the Minnesota line of thought.

  12. 12 David Glasner July 27, 2011 at 7:54 am

    Larry, Thanks for stopping by; it’s good to hear from you. I haven’t been following the personnel changes at the St. Louis Fed, so you are undoubtedly right that it is no longer a bastion of Monetarism. Sic transit gloria mundi. Is the University of Chicago economics department?


  1. 1 “The power of words” | Historinhas Trackback on July 15, 2011 at 9:55 am

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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