Duration : 0:3:27

Stiglitz: “Monetary policy will not get us out of the mess, and all this discussion about monetary policy is a distraction…. The Fed is very good at creating problems, not so good at resolving them. QE3 won’t help.”

Stiglitz goes on to explain why quantitative easing didn’t work (and I paraphrase what you’ll see in the video below):

1. QE didn’t lead to more lending, partly because we haven’t fixed the banking system.

2. Lower interest rates typically do not have much effect on investment in an environment like the one we’re in right now.

3. Slightly lower interest rates on bonds might have encouraged speculation in the stock market, driven up stock prices, which might induce people to consume more. But since it was pre-announced that the intervention would just be temporary, why would people go out and consume based on a knowingly volatile stock market? Only the foolish would have gone out and consumed based on a temporary boost in stock prices.

4. Competitive devaluation might have had some effect, namely lower interest rates leads to a lower US exchange rate, helping US competitiveness. Fed would never admit that this was the goal, but that was probably the only effect that was significant. But other countries responded in ways that limited the size of the positive impact. And benefits over medium term are probably negative.

5. All of this might pose the risk of higher prices back in the US – and what does the Fed do if growth remains low but inflation rises?

Duration : 0:6:46

Duration : 0:9:46

Duration : 0:9:52

Duration : 0:11:42

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Duration : 0:30:3

Duration : 0:6:42

Duration : 0:8:1

Conventional wisdom which suggests that rising interest rates crush stock prices and that falling rates stimulate the market.

I first published a version of this chart on a message board in 2007, when the Fed cut rates after a market selloff. I’m not unique in charting this relationship, nor in using it to challenge conventional thinking, but I do think that I have something to contribute to the discussion.

At that time, in 2007, the market was struggling and the consensus was that cutting rates would ‘save the day’.

This chart suggested otherwise and was subsequently proved correct. Rates were slashed but the market continued to fall – just as it had done from the peak in 2000.

I’m afraid it is now time to look at this chart from the other perspective. Stocks have made a major move up, rates have bottomed but rumblings are being made that they will rise over coming months.

Clearly, interest rates and stocks have, during the period in question generally enjoyed a surprising relationship. There was a period from 1995 to 1998 where rates were falling while the market rose but taking simple tops and bottoms in 2000, 2003, and again in 2007 it certainly looks as though stocks and rates have a correlation – and that stocks lead the relationship, not the other way around as is generally touted.

Why would this be – surely rising rates should kill the market, and easing of rates simulate. Isn’t that what we’ve just seen in the recent rally as liquidity from 0% interest rates gushed into the market?

How the Fed ‘sets’ interest rates…

http://mises.org/story/2728

Jim Cramer ranting to “cut rates and save the market”:

SPY vs TLT (Bond fund)..

http://finance.yahoo.com/q/ta?s=SPY&t=5y&l=on&z=m&q=l&p=&a=&c=tlt

The yield curve…
http://stockcharts.com/charts/YieldCurve.html

Duration : 0:9:49