I noted last week that there is some vocal - and well-placed - opposition to Fed Chairman Ben Bernanke's quantitative easing plans. The big criticism, made clear by GMO chairman Jeremy Grantham, is that this experimental form of monetary policy easing gooses share prices. And in the process, it threatens to inflate more asset bubbles which will cause more damage somewhere down the road.
In a Washington Post op-ed column that outlines the reasons behind this second round of quantitative easing, Mr. Bernanke actually points to stock prices specifically (emphasis mine):
"Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending."
In other words, the Fed is actually targeting stock prices as a necessary condition for getting the economy back on its feet. As Mr. Grantham noted, this is dangerous because the Fed invariably loses interest in the stock market after the economy has recovered, feeding the likelihood of big, bad reversals.
Felix Salmon, the Reuters blogger, made a similar point in reaction to the Post piece: "Surely if we've learned anything from Greenspan's mistakes it's that the Fed shouldn't be trying to support stock prices, and that attempts to do so are liable to end in tears."