This month’s stock market decline is best described as a “Ben Bernanke correction” with investors adjusting to likely shifts in monetary policy as economic growth speeds up, The Wall Street Journal said in an op-ed.
The newspaper weighed in after President Donald Trump sent out a twitter message in response to the market turmoil, with the S&P 500 declining as much as 12 percent from its recent peak: “In the ‘old days,’ when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!”
Trump was referring to the “good news is bad news” paradox that stocks decline after positive economic data are published, such as the non-farm payrolls report that showed wages rose faster than inflation in January.
“But Mr. Trump is missing that faster growth requires a fundamental shift in the monetary policy of the past decade,” according to the editorial. “In particular this means the looming end to the financial repression that the Federal Reserve has been practicing since the financial panic.”
Bernanke was chairman of the Federal Reserve during the 2008 financial crisis that led to the deepest economic contraction since the Great Depression. In response, the federal government bailed out banks, carmakers and insurance companies, while the Fed cut interest rates to record lows.
“For nearly a decade the Fed has intervened in financial markets to repress the long end of the bond market,” the WSJ said. “It scooped up the bulk of new long Treasury bonds, as the European and Japanese central banks later did in their economies.”
The central banks sought to urge investors to put money into riskier assets like stocks, junk bonds and real estate. As the value of those assets rose, consumers would feel wealthier and open up their wallets, the theory went.
Critics of the Fed said the policy distorted asset prices, pushed investors into risky assets that will come back to haunt them during a recession and didn’t do much to help U.S. productivity.
The challenge that new Fed Chairman Jay Powell faces is raising interest rates back to historically normal levels to give the central bank more room to cut them during a recession. But the Fed doesn’t want to contribute to a collapse in asset prices or a ruinous market decline that’s even worse that last week’s correction.
“Eventually asset prices will find a new level that reflects economic fundamentals, but the process may be messy,” the WSJ said. “The good news is that U.S. economic fundamentals are as strong as they’ve been since 2005, and maybe 1999. And in that sense the Trump -GOP policy mix of tax reform and deregulation is well timed.”
David Rosenberg, chief strategist and economist at Gluskin Sheff, took issue with that assessment in a Feb. 23 report to investors.
"In 2005, we were heading towards the most pernicious housing bubble in history and in 1999 we were moving rapidly towards a massive tech bubble," he wrote. "Nice comparisons. We should all be reassured by them."
Rosenberg said the U.S. economy added $14 trillion in debt since during the recovery cycle, as much as it did during the 2007-07 credit bubble. That level of debt will spell trouble as interest rates rise.
"Does anyone out there have any recollection as to how that ended once the rate cycle moved the other way, and with the all-important lags?" Rosenberg asked.
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