My post on US stock markets and monetary disorder led to some friendly but challenging comments from Diego Espinosa. Diego is certainly right in the sense that the US stock market sometime ago broken through the pre-crisis peak levels and the stock market performance in by any measure was impressive.

It might be worth noticing that the US stock market in general has done much better than the European markets. I take a closer look at that below. To illustrate my point I have looked at the Dow Jones Industrial Average DJIA for the period from early and until today and compared that with the period from to Other stock market indices could also have been used, but I believe that it is not too important which of the major US market indices is used to the comparison. The graph below compares the two episodes.

These are the months where DJIA reaches the bottom during the crisis. Neither of the months are coincident as they coincide with monetary easing being implemented. In April FDR basically initiated the process that would take the US off the gold standard in June and in March Bernanke expanded TAF and opened dollar swap lines with a number of central banks around the world.

The announcement effects are very powerful. The episode illustrates that very clearly.

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That is nearly double of the increase of DJIA in as is clear from the graph. Obviously this is an extremely crude comparison and no Market Monetarist would argue that monetary policy changes could account for everything that happened in the US stock market in or However, impact of monetary policy on stock market performance is very clear in both years. A very strong illustration of the fact that monetary policy is not everything that is important for the US stock market is what happened from June to May In that nearly two year period the US stock market was basically flat.

Looking that the graph it looks like the stock market rally paused to two years and then took off again in the second half of In June the so-called National Industrial and Recovery Act was implemented by the Roosevelt administration NIRA. NIRA massively strengthened the power of US labour unions and was effectively thought to lead to a cartelisation of the US labour market.

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Effectively NIRA was a massively negative supply shock to the US economy. That is exactly what the US stock market did.

The gold exit led to a sharp stock market rally, but that rally was soon killed by NIRA. In May the US Supreme Court ruled that NIRA was unconstitutional. As the graph shows very clearly the stock market took off once again after the ruling. However, contrary to the Great Depression the US has avoided the same kind of policy blunders on the supply side over the past four years. While the Obama administration certainly has not impressed with supply side reforms the damage done by his administration on the supply side has been much, much smaller than the disaster called NIRA.

Hence, the conclusion is clear — monetary easing is positive for the stock market, but any gains can be undermined by regulatory mistakes like NIRA. Central banks should ensure stable growth in nominal GDP, while governments should implement supply side reforms to increase real GDP over the longer run. That would not undoubtedly be the best cocktail for the economy but also for stock markets. Finally it should be noted that both FDR and Bernanke failed to provide a clear rule based framework for the conduct of monetary policy.

That made the recovery much weaker in s than it could have been and probably was a major cause why the US fell back into recession in Similarly the lack of a rule based framework has likely had a major negative impact on the effectiveness of monetary policy over the past four years. PS this post an my two previous posts see here and here to a large degree is influenced by the kind of analysis Scott Sumner presents in his book on the Great Depression.

I look forward to the day it will be available to an wider audience. Lars, Thanks for publishing the data, which clearly support your thesis that the gold standard exit fueled a more powerful initial gain in stocks. The NIRA explanation for the leveling of stock prices seems entirely plausible. I think, however, that there is still an interesting dynamic working underneath the surface. As a result, corporate profits recovered to peak, the corporate WACC plunged and business investment ex-structures boomed.

I would cite three factors: The above are arguably structural, not cyclical factors. How can monetary policy overcome these factors? Another way of asking: Despite my reservations about NGDP targeting, I wish Bernanke would conduct a real-world experiment to find out!

As far as making up the gap, home prices have not yet reached equilibrium because mortgage contracts are very sticky. That process is only now starting to happen in a few markets in the US. Once prices equilibrate, we ought to see higher employment growth particularly in structures.

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Who did most for the US stock market? Monetary policy can have a powerful effect on share prices To illustrate my point I have looked at the Dow Jones Industrial Average DJIA for the period from early and until today and compared that with the period from to NIRA was a disaster A very strong illustration of the fact that monetary policy is not everything that is important for the US stock market is what happened from June to May Posted in Ben Bernanke , Federal Reserve , Scott Sumner , Transmission mechanism.

Tagged Ben Bernanke , FDR , Federal Reserve , Great Depression , Great Recession , Scott Sumner. Posted by Lars Christensen on May 28, https: Leave a Reply Cancel reply Enter your comment here Fill in your details below or click an icon to log in: Email required Address never made public.

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