Quotation of the day…

…is from an interview with Eugene Fama, Nobel laureate and Professor of Finance at the University of Chicago. Hat tip Alex Tabarrok at the Marginal Revolution blog:

Every day we hear a story about the movement of stock prices. But the story is different each day. So basically, these stories are made up after the fact. But when we look at it systematically, we don’t see a big effect of Fed actions on real activity or on stock prices or on anything else. That’s why I used to say that the business of central banks is like pornography: In essence, it’s just entertainment and it doesn’t have any real effects.

Dr. Fama is making a somewhat esoteric point about how central banks work. I believe he is referring to the fact that central banks create money by making loans. The money so created doesn’t really “exist” in the sense that it is only a credit offset by a debit.

It’s a good point, wryly made. It just needs to be added that it matters immensely how the “non-existant” money, once created, is subsequently used. There are basically two options: production (e.g., making food, clothing and shelter), and consumption (e.g., war and cigarettes).

One thought on “Quotation of the day…

  1. This appears to be another use of the “market”as the “economy” theory. While it is part of it, it is not THE economy. Those of us not in the market or big stockholders are reasonably more affected by FED actions then Market reactions to other forces.

    As an example, with the Fed controlling interest rates, I have been able to lock in a refinance of my primary home at an APR of 2.65%. I will be taking cash out and pay off a majority of non-mortgage debt. And my payment will be LOWER than current, even with the additional amount being financed. THis has to do with FED actions and the mortgage market place. NOT the stock market.


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