“If it gets any worse than it was at the November 2008 ‘lows,’ and the subsequent March 2009 ‘undercut lows,’ they might as well close the NYSE and I’ll retire.”
This quote caught my eye, for several reasons. But specifically because of the suggestion in an interview with three economists in a recent Business Week. Roger Farmer, of UCLA suggests that (and as humorist Dave Barry says, I am not making this up so I will copy the exact quote)
The answer, in Farmer's view, is for the Fed to set a target for how high it wants the stock market to be by a certain date, then commit to buying enough shares (through broad-based index funds) to hit that target. Higher stock prices will make people feel wealthier and spend more, creating prosperity. Symmetrically, he would have the Fed sell to hold down prices in boom times.
While magazine covers like Newsweek proclaim We are All Socialists Now, this really takes the idea of the Plunge Protection Team where ala Startrek, No one has gone before. Indeed, why bother with the Exchange at all? No brokers, no expensive seats, no need to read the financial press, just punch FED.com to see where the market is going today!
Is this the harbinger of the next wave of government involvement, CHANGE as Obama promised. Well the government is certainly re writing bankruptcy rules designed to protect creditors in favor of workers. If the neighborhood donut shop goes broke, does the employed baker take charge rather than the bank, apparently so under GM Chrysler rules.
We address mood on this blog. Economist Sargent thinks it would be a good idea to simply change the mood of the public but stops short of saying just how we should do that.
Sargent now says that theory was an oversimplification. In real life, he explains, households and businesses are highly uncertain. Developments such as an unexpected government action or a major company going bust can cause people to drastically revise their beliefs about what might happen next.
The good news: Beliefs may shift back again through unexpected positive events. Sargent is not willing to say how that might happen, but he notes that in the early 1980s the Federal Reserve was able to lower the public's expectations about long-term inflation. That, in turn, caused actual inflation to fall, ending a period of stagflation.
Socionomics holds that mood moves the markets. Here Sargent simply suggests that all we need to do ala some sort of 1984 Vision, is change the mood and we change the markets.
Hmm, Jeff Foxworthy for the new FED chairman anyone? When the economy needs a spurt, trot out comedian, when it needs to tone down, perhaps we introduce Woody Allen's concept of his Jewish Mother always chiding us for what we should have done for her.
That Issue of BW asks the cover question, What Good are Economists? Well now we know!
Professor Elam 
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