Market prices vs. Bernanke prices

Reuters

U.S. Federal Reserve Bank Board Chairman Ben Bernanke takes a drink of water as he arrives to speak to a joint congressional hearing on the country's economic outlook on Capitol Hill in Washington April 2, 2008.

Article Highlights

  • Fed Chairman Ben Bernanke gave the stock and bond markets a "barrel of whiskey"

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  • "Bernanke prices" will tend towards market levels as the Fed changes course

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  • Stock and bond prices fall as Fed initiates an economic "hangover"

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How shall we understand the big drop in stock and bond prices of the past two days?  Put simply, as a return to something more like market prices of assets than like the manipulated Bernanke prices to which we had become accustomed.

Benjamin Strong, the leading Federal Reserve actor of his day, famously decided to give “a little coup de whiskey to the stock market” in 1927. Ben Bernanke, in contrast, gave the stock and bond markets a barrel of whiskey.  We will observe how bad the hangover will be.

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