Compare and Contrast: Do the Markets Dictate Government Policy?
The markets are from Mars, and politicians are from Venus. The markets want more government stimulus. Governments just want to pay the debts they’ve already incurred. (Well, most governments).
At the core of these debates is a struggle for control: Who’s calling the shots? Markets or governments?
Ever since the financial crisis, world politics, the world economy and the world markets seem to be inextricably and uneasily intertwined: fiercely independent countries like Germany and France are finding their fortunes jumbled up with other countries like Greece, Italy and Spain. The strain on the Eurozone — and the European Central Bank, its equivalent of our Federal Reserve – is becoming intense as entire countries face default. Upcoming elections over the next 14 months in France, Germany and the United States are forcing politicians to show they’re up to the job of governing through a financial crisis so intense that it has enveloped most of the industrialized world.
So what’s a politician to do? They can start by talking a good game. Angela Merkel, Germany’s chancellor, has been opposing the idea of a eurobond, which would tie together the debt of all of Europe’s nations. It’s natural that Germany – which isn’t struggling — would oppose getting even more entangled in the debt of Italy, Spain and Greece.
But then Merkel went one step further, declaring independence from the markets:
“Politicians can’t and won’t simply run after the markets,” Merkel said in the chancellery interview, her first since returning from a three-week summer break. “The markets want to force us to do certain things. That we won’t do. Politicians have to make sure that we’re unassailable, that we can make policy for the people.”
Good luck with that. Governments still rely on public markets to get enough money to get through the day, week, month and year. “The people” can’t bring a country to the brink of financial disaster in mere days. The markets can.
Compare that, of course, with the more frank appreciation of the effect of the markets in the United States. Federal Reserve Chairman Ben Bernanke measured the success of the most recent round of government stimulus – buying Treasury bonds, or “quantitative easing,” — by its chance to help goose the markets. In his own words:
“Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action….Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”
Later, on CNBC, Bernanke said:
“Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of [quantitative easing, or QE]. The S&P 500 is up 20%-plus and the Russell 2000, which is about small cap stocks, is up 30%-plus.”
When the head of the world’s most influential central bank measures his success by how the markets receive his policies, well, then the jig is up: the markets win. They’re in charge.
This week, Bernanke will be chatting and schmoozing with other economists at the Jackson Hole Conference, which is considered an important indicator of the future plans of central bankers. If you ask most experts what it would take to convince Bernanke to install another round of stimulus like quantitative easing, their answers boil down to one thing: it depends how the markets are doing.
Here’s David Semmens, U.S. economist at Standard Chartered, in a note to clients today. He pinpoints what the Fed needs to see to spur more stimulus: an unhappy market.
“This time around, we believe there needs to be even more market disruption to persuade Bernanke to signal imminent QE. In particular, it would probably require a continual free-fall in the stock markets and a further sharp decline in market-based measures of inflation expectations.”
But even if the markets call the shots on policy, they still are completely separate from the economy. (Marketplace had a whole podcast devoted to this idea on Friday). So even if markets affect policy, they still won’t affect the economy, as Peter Boockvar points out. He’s an equity strategist for Miller Tabak.
“QEII, as it’s otherwise known, was well received by markets because it helped to lift asset prices- temporarily as we’ve seen, but critics knew there was no real-life economic impact as evidenced by the almost zero growth seen in the 1st half of 2011. If QE3 gets the greenlight, expect again only a cheer from asset markets — but a cheer that won’t last very long again because the Fed has well worn out its welcome that will give no help to actual economic growth.”
The really worrying question, after four years of every kind of government stimulus that man has dreamt of, is that we may have the wrong idea entirely: policy may not do anything at all to help the economy. At least, it hasn’t so far.
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