First, it assumes that a dollar invested in stocks should have the same wealth-creating effect as a dollar invested in bonds.
This is a very big problem because once confidence returns, and credit begins to flow more easily, we could end up with runaway inflation, an even bigger problem as this would wipe out savings and have a wealth-destroying effect.
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With a housing-wealth effect twice as large (the same size as in Mr Muellbauer's study) and one and a half times as speedy, it would be 1.5% lower a little earlier.
There is also a wealth effect whereby home-owners feel richer, and spend more, as the value of their homes increase.
He added that the slowdown in the housing sector looks to reduce the so-called "wealth effect" on consumers, leading to a slowdown in spending.
Private consumption is picking up and will continue as the wealth effect of a stock-market bull run kicks in.
Bernanke insists that the plan will stimulate investment through lower interest rates and potentially stimulate spending through the wealth effect, notwithstanding the counter-arguments stated above.
All this shifting of wealth is a zero-sum game and the net effect on incomes is usually zero, or even negative.
The Federal Reserve, with Chairman Ben Bernanke at the helm, has tried desperately to prop up the economy, introducing two programs of quantitative easing, or long-term asset purchases designed to lower interest rates, spark a wealth effect, and alter expectations.
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They also have an indirect impact via the wealth effect, as consumers increase their spending in response to improvement in their balance-sheets (see article).
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In either case the weakening effect on the dollar should lift short-term earnings prospects for American exporters and the positive market response should spur consumer spending via the wealth effect.
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