In November 2010 Ben Bernanke made boosting the stock market part of the official economic policy of the US Federal Reserve. He announced the policy change publicly in a Washington Post Editorial, saying:
The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose…
…higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
In short, Bernanke was saying that by buying government securities he knew that the Fed was rigging the stock market to go higher and that that would result in “trickle down†which would spur economic growth. The ultimate goal was to boost incomes and profits in a “virtuous circle,†which would lead to increased employment.
…the Federal Reserve has a particular obligation to help promote increased employment…
Bernanke said that the reason for the policy was that it worked in the first place in 2009 when the Fed instituted it.
Among the Fed’s responses was a dramatic easing of monetary policy – reducing short-term interest rates nearly to zero. The Fed also purchased more than a trillion dollars’ worth of Treasury securities and U.S.-backed mortgage-related securities, which helped reduce longer-term interest rates, such as those for mortgages and corporate bonds. These steps helped end the economic free fall and set the stage for a resumption of economic growth in mid-2009.
This assertion was virtually universally accepted by Wall Street, the mainstream media, and the public in general. In fact, it has become conomic gospel, a central tenet of Keynesian and monetarist conomic orthodoxy. But it was an assertion, devoid of any proof. It was unproven and unprovable because no other major central bank in the world tried anything different in the wake of the 2008 collapse. They all went to ZIRP and QE in lockstep with the Fed. We simply do not have a basis for concluding that these policies drove the recovery and not other forces.
