Comments on: QE2 and the undead homicidal zombie market A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: JDB Wed, 17 Nov 2010 13:48:57 +0000 But this is a daft argument. Yes, we are in uncharted territory and we don’t know what QE2 will do — but there are good reasons to think it should help, so let’s give it a go. Your argument is basically just fretting that we don’t know it all.

Does this come down to a matter of temperament? Some people are inclined to act in a new, bad situation, and some are paralysed with nerves?

By: Greycap Wed, 17 Nov 2010 11:56:42 +0000 What agradstudent said.

It is amusing that you have juxtaposed this post with one in which you muse about Tina Brown’s “reality distortion field.” That, at least, is a subject in which you have formidable expertise: the problem here is not that your blog has been “too heavy” on QE, but rather, too lightweight.

By: agradstudent Wed, 17 Nov 2010 02:58:58 +0000 I don’t want to be the ornery academic economist here, but both you and Baruch are in need of a lengthy primer on asset pricing. (And yes, I acknowledge that markets aren’t always perfectly rational and efficient, but that’s not the point here. You are not positing any strange behavioral dynamics on the part of investors — as far as I can tell, the vague and confused model you’re using does not incorporate any specific departure from rational responses to incentives. It just gets the responses wrong.)

This bizarre statement is a case in point:

“Instead, the stock market becomes a place where people park their money in the hope that it will go up and in the expectation that if it goes down, the Fed will step in and rescue them.”

How, exactly, does the Fed “rescue” them? There are really only two possibilities. First, the Fed improves the real economy and thus asset prices. Under this interpretation, the market currently believes that the Fed *could do significantly more* to boost the economy — which is inconsistent with essentially everything else you’re saying.

The other possibility is that the Fed lowers the real interest rate by increasing inflation expectations. The problem here is that it’s clear that real interest rates are currently *above* the equilibrium level; that’s why nominal spending has fallen so much in the first place, and it’s why a widespread increase in the supply of savings hasn’t translated into a boost in capital investment (which it ordinarily would — if not constrained by the zero lower bound, the real interest rate would fall until savings and investment reached equilibrium). By lowering the real interest rate, therefore, the Fed actually removes a distortion currently present in capital markets — which is again exactly the opposite of your claim.

From an asset pricing perspective, the claim that QE is causing the runup in commodity prices (or even a fraction of it) is also completely incoherent, except insofar as QE has lowered the real interest rate — which, again, is *removing* a distortion in markets, not creating one.

By: q_is_too_short Tue, 16 Nov 2010 23:56:52 +0000 Do you have any argument here besides being afraid?

By: gpowell Tue, 16 Nov 2010 22:26:24 +0000 Your logic makes no sense. Anytime the global markets think there is a better prospect of an American recovery, they will ramp up. Anytime they are disappointed, they will fall.

Your arguments against QEII, which is modest by any measure and has already been tried in Japan with small effect, are the same arguments against any type of stimulative measure — that it could possibly cause a bubble. Perhaps extra liquidity is ginning up the markets a lot, perhaps not. So should that fear justify doing nothing.

I guess the best way to avoid that is to have long, drawn-out depression. No bubble concerns there.

By: Bernanke Tue, 16 Nov 2010 22:26:13 +0000 I don’t understand how looking at IOC, OPEN and UTA makes the point that this is a short-covering move. Almost all stocks (correlation) look like that.

And it looks like the whole commodity play is over, so what Baruch is talking about is old news.