The other day while I was organizing my office for the umpteenth time, (how is it that someone as obsessively organized as I am consistently has a messy desk?) I heard a reporter on the television say, “The markets love Bernanke.” I immediately glowered at the screen. After a few annoyed minutes and some distracted paper cuts, I realized, she’s right. Clearly if talk of him not getting reappointed causes the markets to drop, they must have some affection for the man. But how can this be? I come from the school of thought that increasing the bank reserves from $10 billion to $980 billion in a few months is not the best solution for an economy in turmoil and of course believe that any rational human being would agree with me, (note wry grin) so why do the markets seem to love him?
Then it dawned on me as I cleared away the seriously overused coffee mugs that hold my precious nectar of the Gods every morning. The markets love liquidity, thus Ben Bernanke. It is a bit like the love an addict has for their dealer, or me for my espresso machine. I highly recommend the Jura Capresso for those suffering from the same affliction. The recent talk that he might not get confirmed briefly sent the markets into a tizzy as their liquidity dealer might get kicked out of the neighborhood.
So why does an increase in liquidity cause asset prices to rise? You can think of it like a seesaw, with the price of money on one end and the price of assets on the other. As the price of money (interest rates) goes down, the price of assets goes up. If Bernanke is replaced with someone who is less likely to keep their side of the seesaw down, asset prices will drop.