Are Markets Stupid?


Are markets stupid? Or what?  Today’s (July 26) worldwide rally was apparently sparked by this statement from Mario Draghi (from the Wall Street Journal):

‘[The European Central Bank is] “ready to do whatever it takes to preserve the euro,” which analysts say could include Spanish bond purchases and further stimulus.’

This statement is positively Krugman-esque.  Serious economists know there are limits to monetary policy.  A central bank can, at best, create money.  (In the U.S. with our current excess reserves trap, the Fed’s ability to influence M1 is debatable at this point.)  Mr. Draghi seems to think a central bank can solve all problems.  He should learn some economics.  We know that, like most institutions, there are limits to what monetary policy can accomplish.