Bernanke loved to tout the wealth effect
via @victorleonardib
The basic idea of the wealth effect is that as household wealth rises, people spend more. So if your house value goes up, you'll buy more shoes. If your stock portfolio rises, you'll take the family out to dinner.
That thinking was the basis and justification for many Fed policies in the past decade and Ben Bernanke frequently cited it when he boosted stock returns to ever higher levels with QE programs.
Barry Ritholtz at Bloomberg absolutely tears it apart today.
"Either the Fed is advocating trickle-down economics, on the assumption that rising wealth of the richest Americans will lead to more spending that benefits everyone; or the central bank has a misplaced faith in how the wealth effect helps the average American," he writes.
His argument is that by targeting asset prices, the Fed is treating the symptom, not the cause. Ritholtz says people spend when the economy is improving and that same improvement also tends to boost stock prices. But the Fed tried to boost stock prices alone, thinking it would do the same.
He makes a great point.
