Congress to Bernanke: “Why Aren’t Your Rate Cuts Buoying Stocks?”
Paraphrasing Congresswoman Sanchez who asked Bernanke why stocks jump in the aftermath of rate cuts only to sell off harder once the afterglow wears off. She questioned whether the Fed’s tools were no longer sufficient for the current crisis.
Of course, the right answer is the Fed is not interested in propping up stock market indices but rather, is acting to preempt systemic risk. That’s not what Bernanke said.
“Think about how bad it would have been without the rate cuts.” Yes, that was his answer.
Perhaps there are benefits to being incredibly cryptic to the exclusion of comprehension.
Another Congressman (didn’t catch his name) made the point that the housing market is not driving the current financial crisis but rather is a symptom of the underlying weakness in the economy. In a rare case, I agree with a politician not named Ron Paul on an economic point.Simply, if people were making more money, they would be able to afford the houses at current prices. But as I’ve mentioned previously, the trick is to increase income through productivity, not inflation and no one has a plan to do this. Bernanke regularly crusades against wage inflation as he believes that will be the final catalyst toward an inflationary spiral. He’s correct but this leaves us in a precarious situation.Sucks to be him.
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April 2nd, 2008 at 3:32 pm
How does Bernanke crusade against wage inflation, and what is it supposed to accomplish? I do not understand how “wage inflation” can be separated from “inflation”, and I see inflation as mostly if not entirely caused by the Fed. Curious to hear your thoughts.
April 2nd, 2008 at 5:00 pm
On a fundamental level, you are right in that inflation is a monetary phenomenon and any distinction between wage inflation, asset inflation, etc. is pretty much arbitrary. But the mainstream financial media have bought into these distinctions and that’s why you have these fictions like core CPI or people regularly comparing today’s CPI with the 70′s numbers (which is like comparing oranges to tangerines as a number of methodology changes have been introduced since then).
Pre-credit crunch, Bernanke would regularly discuss tight labor markets and wage inflation at these political testimonies. If workers went to their bosses en masse and demanded higher wages, this could pressure companies to raise prices to maintain margins thus cutting into consumer purchasing power, forcing those workers to go back and demand higher wages and so on.
These “inflationary pressures” still exist of course; it’s just that the workers as a whole have very little leverage to act on them. Many of these people have also levered up (mortgages, car, student loans, credit cards, etc.) so they can’t afford not to be working which hurts their bargaining position. The unions have been decimated and the gap between skilled, in-demand workers and unskilled fodder continues to grow. We have no real hope of educating or training these workers to bolster their value in the job market in the short term and probably need to reconfigure our economy before this can happen in the medium/long term. Since these people have no leverage in the job market, we are witnessing these “inflationary pressures” in the political market — hence the resurgent populist, anti-trade, anti-China rhetoric. And if the business elite aren’t careful, it won’t just be rhetoric.
Probably rambled on more than you wanted.
April 2nd, 2008 at 9:45 pm
Thanks for the reply. I appreciate the extended discussion. The scenario for workers demanding raises and causing inflation doesn’t seem plausible to me, but it is the kind of thing you hear politicians and pundits say, I can believe Bernanke pushed it.
I suspect the falling prospects for unskilled labor in the US will be a pivotal political issue over the next few decades. It will get worse before it gets better.