August 26, 2011
Hopes that the US Federal Reserve chairman can wave a magic wand are wishful thinking.
Who would want to be Ben Bernanke at the moment? The US Federal Reserve chairman is en route to Jackson Hole, Wyoming, where he will speak at midnight tonight Australian eastern time.
The US sharemarket has surged this week on speculation that Bernanke will step in, wave his magic wand over the US economy and produce another round of quantitative easing. QE3, as it is known, would be likely to involve the Fed buying bonds as a way of pushing down long-term interest rates and encouraging borrowing.
Why the market feels that QE3 is the silver bullet to the economic downturn or that Bernanke will even announce such a plan shows how desperate the hunt for good news is at the moment.
It seems to be operating on the theory that if it is said enough times then maybe it will come true. Either that or those in the market are trying to push up share prices in an effort to cash in on some short-term profits, which have been hard to come by in recent weeks.
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Any way you cut it, though, it appears the market has conned itself into believing that it is getting an Xbox for Christmas when there is a second-hand Atari sitting under the tree.
It has done this because Jackson Hole is the venue where Bernanke signalled a $US600 billion Treasuries purchase plan, or QE2, a year ago. Shares rose 28 per cent on that news and the market is nostalgic in thinking that Bernanke can play it again.
However, there are many reasons why history won't be repeating itself.
First, Bernanke would need to persuade the other members of the Fed that QE3 would be an effective shot in the arm for the economy. When he put that argument a year ago, only one board member disagreed.
Now, he has three to contend with: the Federal Reserve Bank presidents of Minneapolis, Philadelphia and Dallas, all of whom voted against a measure earlier this month to keep interest rates at near zero until mid-2013.
The reason these three are unlikely to support further easing is because it is debatable how effective QE3 would be in spurring borrowing in a market where credit is already so cheap. Yields on bonds are also at historic lows, making you wonder how much encouragement nervous investors need to ... Read full article by Mathew Murphy @ http://www.smh.com.au/business/markets-hang-on-bernankes-words-20110825-1jcdd.html
