Congress & White House Fiddle While Economy Burns
Posted by Michael A. Kamperman on August 21, 2011
They’re all on vacation while the stock market is tanking and fear is rapidly rising. The fools at Standard & Poors who downgraded U.S. debt have proven their irrelevance as interest rates on the 10 year Treasury dropped under 2%, a multi-decade low. Everyone else in the world knows there is nothing safer than U.S. Treasuries. This latest wave of panic was set off not by people questioning the AAA worthiness of the U.S., but by questioning everyone else rated AAA. Hence France and French Banks didn’t seem to measure up so people ran from French financial assets to U.S. Treasuries, which is of course the opposite of what the fools at Standard and Poors predicted. Why this organization still exists after destroying the economy by rating subprime mortgages AAA is still a mystery. The trading action in U.S. Treasuries prove the dual point that the markets accept the U.S. can always pay because they can alays print and that it is the Federal Reserve that controls interest rates and not Asian bond buyers. Yet with fear gripping global markets and U.S. economic measurements plunging no one in a leadership position in Washington is putting forward a plan, especially a plan that will work and can be implemented now.
In one of the worst political optics in recent memory President Obama promised to put forward a new jobs plan when he returns from his 10 day vacation to Martha’s Vineyard. This is the last real chance to use fiscal policy to right the sinking economic ship before 2013. This is the last chance for President Obama to pivot out of his flirtations with Austrian Economics and plant his foot firmly in the Keynesian camp. This is the last chance to put forward something bold. But I won’t hold my breath. Calling for extending unemployment benefits and the 2% payroll tax cut into 2012 is only going to save jobs, not create jobs. We already have those things now and the economy is tanking. The President needs to put forward something that can pass Congress and not something to frame his 2012 re-election campaign. The way to get something to pass is to do something bi-partisan, which means something for you and something for me. The President has to be willing to trade some things for a big jobs plan and I’m not sure he is willing to do that. I’m also unsure that the Republicans in Congress are willing to do that. And without a bi-partisan trade nothing is going to get done on the fiscal front.
The only thing we can realistically hope for in the near term is QE3. Bernanke signalled strongly at the last Fed meeting that he is willing to go there, and go there for real this time. His promise to keep interest rates near zero through mid-2013 with three no votes is as strong a signal as he can send. He’s willing to lead, take responsibility, and move forward without consensus. Here are two things he should do to send the most effective signal he can that he will pull us out of the depression. First and foremost he should return the $1.6 trillion in U.S. Tresuries the Fed owns to the Treasury and shrink his balance sheet. This will show Congress, the President, and Americans of every stripe that jobs is the number one issue and not the national debt. The second thing the Federal Reserve should do is buy up the millions of foreclosed homes, turn them into rental properties, and remove them from the housing market. This would end the housing crisis and would send a signal to the banks that it would be safe to loan on homes again. We don’t need the Federal Reserve to compete with bond buyers for high grade bonds, we need the Federal Reserve to provide direct cash stimulus to the area it is needed the most and that area is restoring the housing market. Desperate times call for desperate measures and we are desperate.
