> "Shaping investor expectations through communication does appear to be
> a viable strategy," Mr. Bernanke and his co-authors, Vincent Reinhart
> and Brian Sack, concluded. "By persuading the public that the policy
> rate will remain low for a longer period than expected, central
> bankers can reduce long-term rates and provide some impetus to the
> economy, even if the short-term rate is close to zero."
This is a return to Keynes:
"The current long-term rate of interest is a highly psychological phenomenon which must necessarily depend on what expectations we hold concerning the future rate of interest." (General Theory, p. 202)
"Just as we found that the marginal efficiency of capital is fixed, not by the 'best' opinion, but by the market valuation as determined by mass psychology, so also expectations as to the future of the rate of interest as fixed by mass psychology have their reactions on liquidity-preference; - but with this addition that the individual, who believes that future rates of interest will be above the rates assumed by the market, has a reason for keeping actual liquid cash, whilst the individual who differs from the market in the other direction will have a motive for borrowing money for short periods in order to purchase debts of longer term. The market price will be fixed at the point at which the sales of the 'bears' and the purchases of the 'bulls' are balanced." (General Theory, pp. 169-70)
"the psychological atmosphere towards gilt-edged and other securities ... governs the degree of desire to hold liquid balances. Unfortunately, though very naturally, the readiness to put savings into gilt-edged securities is largely influenced by the ideas which get about as to whether the gilt-edged market is likely to rise or to fall in the future. … Thus it is not a shortage of savings which will impair the position of gilt-edged securities, but a change in psychological expectations as to their future prospects. … The weakness in gilt-edged securities during the last week or two is an illustration of how psychological the market is and how easily its nerves are upset." (Collected Writings, vol. XXI, pp. 398-9)
"The vast majority of those who are concerned with the buying and selling of securities know almost nothing whatever about what they are doing. They do not possess even the rudiments of what is required for a valid judgment, and are the prey of hopes and fears easily aroused by transient events and as easily dispelled. This is one of the odd characteristics of the capitalist system under which we live, which, when we are dealing with the real world, is not to be overlooked." (vol. VI, p. 323)
Ted
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