Wednesday, October 9, 2013

Stock Market: Government Shutdown - The Wisdom Of Ben Bernanke

(Drivebycuriosity) -  The stock market is under pressure these days. The mess in Washington DC - the pathetic government shutdown and the stupid fight about the debt ceiling - creates a stress situation. But stock prices retreated just 4% from their all-time high so far. This shows the wisdom of Ben Bernanke and his Federal Reserve Bank.

On September 18th Bernanke announced that the central bank will continue their stimulus program QE3 for the time being, meaning that the across-the board expected tapering got postponed.  I was surprised because I believed that QE3 wasn´t necessary any more. The global economy is getting stronger because economic growth in China & Europe is gathering speed and the U.S. economy has been continuing their solid advance (weekly jobless claims are back on the level from 2007).

But now can see how smart the Fed decision was. The taper - in combination with the pathetic Washington D.C. mess - would have doubled the stress for the stock market and could have send stock prices far south. A sharp stock market correction could have created a negative wealth effect because many Americans are invested in the stock market. Therefore a sharp drop of the stock market could have caused them to spend less. It also could have induced companies to invest less into capital and to hire less people. The postponed tapering avoids this additional pressure and is therefore smoothing the development of the stock market.

It looks like Bernanke has foreseen the critical political situation and therefore delayed the taper.

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