Radio Rallies and Reversals

So yesterday we talked how loose monetary policy has no effect on the real economy long-term, but it does effect asset prices in the short-term, and it is the wealth effect from rising asset prices that stimulates the economy in the short-term, but at the expense of speculation and potential bubbles. If want an example of speculation in the market, yesterday comes to mind.

“Monetary policy works for the most part by influencing the prices and yields of financial assets, which in turn affect economic decisions and thus the evolution of the economy” (Bernanke, May 2004, American Economic Review). The Fed is deliberately throwing gas on the fire yet at the same time claiming that the market is efficient. We have already discovered twice in the last decade the consequences of such a policy. Is three times the charm?

GB