Posted by Michael A. Kamperman on October 30, 2011
The Occupy Wall Street movement has already had two huge successes. First and foremost it has altered the debate from deficit cutting at all costs back to lack of jobs are the number one issue America is facing, not deficits. Secondly, it has given our President a much needed wake-up call that it’s all about jobs, jobs, jobs. Finally, the President has made a couple of moves in the right direction. He has acknowledged many graduating students have student loan payments that are too high for their too low incomes. He has also moved forward to insist that Fannie Mae and Freddie Mac refinance mortgages that are current without an appraisal and without a new title insurance plan forcing the transfer of the existing plan to the refinanced mortgage. But why not offer the same terms to FHA and VA mortgages? Why not offer the same terms to all mortgages held by all federally backed financial institutions like banks and credit unions? And where have these low hanging fruit moves been hiding at the White House? These moves should have been made months before the last election, not months before this one. The reason these moves are being made now is the President is feeling political pressure from the Occupy Wall Street movement. The lost and forgotten have risen up and the President has sat up and taken notice.
Now the President finds himself boxed in by the deficit cutting super-committee he approvingly signed off on just a couple of months ago. In fact, if a deal is not reached on how to lower the deficit, then across the board cuts will automatically go in on all discretionary spending, including defense. If the President is serious about helping the young people motivated to have their voices heard, then he will reject any deal that cuts their future Medicare and Social Security benefits period! It is the wrong way for our country to go and it is not necessary. Secondly, he needs to give up his politically charged class warfare rhetoric about raising taxes on the rich and call for the passage of jobs bill by using all of the savings from the ended Iraq war as the pay for. The jobs bill has a chance to put some of those young people into a good job, while raising Warren Buffet’s taxes may feel good but it won’t create one single job.
The Occupy Wall Street movement is also providing cover for the Federal Reserve to move forward on quantitative easing 3, probably this week. In Ben Bernanke’s famous helicopter speech he talked about the importance of coordinating monetary policy with fiscal policy despite the supposed independence of monetary authorities. Look for the fed to go big once again on purchasing mortgages to lower the cost of refinancing distressed mortgages even further. This is sound policy and will even be more effective if the President expands it to all federally backed mortgages. I want to give a shout out to Chris Wallace who criticized Rick Perry’s jobs plan for only aiming to create a far too insufficient 2.5 million jobs. Finally someone in the media is asking where are the plans to create tens of millions of jobs. Wake-up President Obama, he is talking about you too.
Posted by Michael A. Kamperman on August 31, 2010
The minutes from the Fed meeting show that no one on the Fed is worried that deflation is a significant near-term risk. No one. Some see disinflation while others still see inflation as the mostly likely outcome, but no one is forecasting deflation. In fact they are forecasting moderate growth for 2011, despite the fact the stimulus will run off in 2011 and there doesn’t appear to be a replacement stimulus bill on the horizon. The Fed is way way way behind the curve again, ala summer 2007. Deflation has already taken hold in the U.S. Deflation is a function of either over-supply or declining demand. Demand has withered for most items, most notably housing. With the expiration of the homebuyers tax credits sales of homes have plunged. How hard is it to foresee housing will remain a drag on the economy? Wages are falling substantially for those fortunate enough to replace lost jobs. What has held up the incomes of many households up until now are unemployment benefits and 401(k) plan withdrawls. Congress is not likely to extend unemployment benefits for individuals beyond 99 weeks. The large scale shedding of workers began roughly 99 weeks ago right after Lehman Brothers was turned away by the Treasury and forced to file for an unprepared bankruptcy. How hard is it to foresee household personal incomes are in trouble going forward?
The question the Fed should be concerned with is not whether the economy will fall into deflation, the question they should be debating is how soon and how forcefully do they need to act to prevent it. Like cancer, it may be too late to cure it if you wait for it to be obvious to see. Look at how Japan has struggled to shake off deflation despite near zero interest rates. Look at how the U.S. failed to shake off deflation prior to the onset of World War II. Frankly, the Fed simply doesn’t know how soon they should act, nor how forcefully. Shocking considering Bernanke is supposed to be the world’s deflation expert.
The Fed knows its only remaining weopon is printing money, which puts a bad taste in the mouths of most avowed inflation hawks. But as inflation hawk St. Louis Fed President Bullard has said, the data is coming in on the low side for inflation, not the high side. And, while he doesn’t see deflation as a probability he wants an orderly framework for how the Fed will decide when to print and how much to print. Shouldn’t this conversation have occurred under Greenspan or Volcker and shouldn’t the Fed have a manual on just what to do in this situation? The reason they don’t is the concept of deflation has seemed inconceivable to smug modern day economists who grew up in the post World War II era. This is the reason all of our econometric models only contain post World War II data. With fiscal policy frozen in Washington the only operational weopon left is monetary policy. I’m know we have waited too long to pull the trigger. So do all the 99ers. There is no doubt the Fed will print more money. The open question is do they have the guts necessary to print the trillions needed?
Posted by Michael A. Kamperman on August 10, 2010
Well that was quick. The Fed looked for an exit strategy in April and returned to printing money by August. Make no mistake the Fed just adopted St. Louis Fed President James Bullard’s strategy of targeting the balance sheet and rasing or lowering the quantity of quantitative easing based on the forthcoming data. Bullard is an economic hero. He provided a plan. Like a lion willing to lay down with a lamb he walked to the other side of the aisle and and said I am a self-avowed inflation hawk , but I see deflation as the risk and I am willing to do the un-thinkable and monetize the debt. Now, the ball is in the politicians court. How many Democrats are willing to step up and say we should not only not raise taxes, but during a major economic downturn we should lower them. How many Republicans are willing to stand up and say we should not only not cut spending, but during a major economic downturn we should raise spending to create jobs. It is time for President Obama to step forward and lead. We need another stimulus plan and the progressive liberals need to back off letting the Bush tax cuts expire.
The Fed effectively has said the TARP wasn’t enough. The Stimulus Plan wasn’t enough. Our previous quantitative easing program of $1.5 trillion wasn’t enough. The tax credit for homes and clunkers wasn’t enough. The economy remains in the ditch and it will take heavy lifting to get it out. The Fed has signalled they have the will. But the Fed cannot do it alone. We must have permanent fiscal stimulus to create an environment of confidence. The best ideas are to lower the eligibility for Social Security and Medicare to 60 and to have the Federal Government take over all Medicaid spending from the states.
What the Fed has done is they have said don’t worry about the deficit or the debt, because we can monetize it and control it. That is the advantage of owing all of your debt in your own currency. Japan owes its debt in yen. Will the Bank of Japan follow the Fed? Probably not until the policy proves successful. Great Britain owes its debt in pounds. Will the Bank of England follow the Fed. Yes, in a heart beat. The countries in the euro owe all of their debts in euros. Will the ECB follow the Fed. Eventually, once there is a massive mutiny against the austerity crowd and they run Trichet out of town on a rail. We have a global problem and we need a global solution. The Bullard led Fed is showing the way.
Posted by Michael A. Kamperman on July 31, 2010
The GDP report was horrific. It came in at 2.4%, well below month ago estimates. What’s worse is it included a 27.9% rise in housing due to the bump in the home-buyers tax credit and it included a small positive contribution from state and local government spending. The tax credit is gone and stimulus based state aid will soon fade away. Also gone is the boost from inventory adjustments. So where do we go from here…down. The economy is clearly heading back down. The President is too busy campaigning and vacationing and doesn’t have the time to focus like a laser beam on jobs. The Senate is a complete embarrassment. This week the Republicans and the Democrats couldn’t agree on the procedural rules to move forward on a critical bill to revive small business lending. Majority Leader Reed is so anxious to return to Nevada to try and save his seat that he was only willing to offer the Republicans a chance to vote on three of their amendments to the bill. The Republicans balked and filibustered with both sides pointing fingers at the other. Yet out of Ben Bernanke’s ‘unusually uncertain’ economic outlook and what to do about it emerges St. Louis Fed President James Bullard. A man with a solid label as an inflation hawk is willing to step away from people’s perceptions of him and call it likes he sees it. He sees the risk of the U.S. heading straight for a Japanese style deflationary trap. He said the Fed may never hit its target of 2% inflation targets if the U.S. enters the trap. An inflation Hawk says the facts have changed and he is willing to print money, soon. When asked how he felt about raising taxes he said it wouldn’t be helpful to reviving the economy. He has firmly placed restoring economic growth and avoiding deflation higher on the priority list than deficit reduction or current U.S. debt levels. While not asked about federal spending it seems as though he would have given the same answer as he did on taxes, it’s not helpful to reviving the economy.
Bullard did more than just say quantitative easing was the best tool available to the Fed, he offered a game plan on how to use it. He has come forward with the innovative idea the Fed should keep a close watch on the data meeting by meeting and adjust the level of quantitative easing based on the data. Basically if things are looking up print less and if things are looking down then by all means print more. He is willing to print as much as is necessary to prevent the slide into deflation. I’m already on record stating the Fed will need to buy back virtually all of the outstanding federal debt, and perhaps much more, to restore the economy to full health.
What we need now is for a prominent Republican or Democrat to step forward and call it like it is: namely now is not a good time to either raise taxes or cut federal spending. Its time to break with type-castes. Its time to say the world changed in 2007 and both sides need a contemporary play book. It probably won’t happen. But with Bullard leading we may survive in spite of the partisans. Monetary policy is an extremely powerful tool. Paul Volcker brought the economy to its knees to battle inflation. The Fed has an unlimited check book to throw at economic revival. It has lacked the wisdom and the will, but Bullard just changed all of that. Look for his strategy to be implemented much sooner rather than later. If not by the election, then soon after. Bullard has proven himself to be not just a leader, but a hero.
Posted by Michael A. Kamperman on July 22, 2010
Federal Reserve Chairman Ben Bernanke gave a speech in 2002 in which he famously said that if it was necessary to prevent a Japanese style deflationary-depression the Federal Reserve could figuratively speaking “drop money from helicopters.” Now, with a Japanese style deflationary-depression staring the U.S. right in the face, the man we placed in charge of the Fed confesses that he doesn’t know how to fly a helicopter. His paper was theoretical after-all, and now he claims he is not sure of what the risks would be if his theory were put into practice. He will place the theory into practice if there is another ‘panic’ and have the Fed resume aggressive quantitative easing. But short of that he is content to watch this “unusually uncertain” economy and dither. There is nothing uncertain about the economy. We are in a deflationary-depression ala Japan. We are repeating the policy mistakes of the 1930′s by focusing more on the deficit than on economic growth. To this day the variables programmed into the Fed’s econometric forecasting model and most other econometric models are based solely on the post World War II inflationary expansion. Hence, what is ”unusual” and causing “uncertainty” is the economy is not responding the way the models predicted. Right now the Fed’s model anticipates unemployment will fall to 7.5% by the end of 2012 without any changes in Fed policy, tax policy, or stimulus policy. To reach that target the economy would need to generate 7.5 million new jobs, which is an average of 250,000 new jobs per month for the next 30 months. I must have missed where Washington D.C. jumped the gun on California to become the first in the nation marijuana tourist destination. At least I hope these guys are smokin something, because it is depressing to think this is actually the best work they can do. Mr. Bernanke, throw away the models and open your eyes.
Short of a ’meltdown’ the Fed is willing to take three steps to vigorously support the job market. First, they are willing to say they will keep interest rates near zero for a really really long-time, rather than for just an extended period of time. Wow, that should open up the job market. Perhaps he should consider how effective this has been for Japan before relying on it as our next line of defense. Second, the Fed might be willing to stop paying the Zombie Banks a quarter of a point interest on the one trillion dollars in reserves they have at the Fed in-order to jump start lending. The WSJ detailed how many many small businesses are being asked to back their loans with cash, in many cases for the full amount of the loan, in addition to the equipment and real estate already pledged to the bank. The Zombie Banks keep insisting that they are ready to make loans to all that qualify, which means if you give them the money to loan back to you you qualify. Small business credit cannot get any tighter than this. Again, hard to imagine the Zombies would open up the credit spigot if they were denied that 1/4% interest payment from the Fed. Third, and this would help at the margins, the Fed is willing to re-invest the mortgage and bond payments it purchased back into the economy. Right now those payments simply lower the Fed’s balance sheet and go back to money heaven. They are neither saved nor spent in the economy. Effectively, the Fed is currently tightening the money supply because all those mortgages payments are not being recirculated back into the economy.
Mr. Bernanke has already presided over an economic slide greater than the slide in 1930 at the start of the Great Depression. Yet despite his reputation he lacks the wisdom and the will to head off either another slide mirroring the one in 1932, or a long drawn out nightmare mirroring the Panic of 1873 and the Two Lost Decades in Japan. He should have told the Congress that the key tool under consideration is the Fed stands ready to support the Treasury market with aggressive purchases to back whatever fiscal stimulus policies Congress deems necessary to spur private sector growth. There is a time and a place for everything, and now is the time to drop concerns about Fed independence and have the Fed and the Congress work together. The housing market is terribly underwater. Why not have a bail-out for the people instead of the Zombies? Congress could offer to refinance and modify any existing mortgage in America for 4% with no credit check. A home would be appraised and if the mortgage is underwater Congress would authorize the balance over and above the value of the home to be paid off by the Treasury. These mortgages started out no higher than appraised value. All Congress would be doing is hitting the housing reset button. Anyone with half a brain is not really worried about the debt or the deficit because they know the U.S. can print what it owes. Democrats want social spending and they want the rich to pay for it. Republicans simply want a strong national defense and to pay less in taxes. Democrats are unwilling to cut out social spending to avoid a deficit. Republicans are unwilling to pay higher taxes to avoid a deficit. Both sides don’t want to pay in some way for the other sides issues. The “tools” the Fed and the Congress need to fix the economy are simple. The wisdom and the will are what seems like a bridge too far.
Posted by Michael A. Kamperman on March 13, 2010
President Obama and his economic team have finally stumbled upon the absolutely best economic decision they could make by nominating Janet Yellen, President of the San Francisco Federal Reserve Bank, to the position of Vice-Chair of the Fed. Ms. Yellen would go from currently being a non-voting member of the Fed to a permanent voting member of the Fed’s Open Market Committee that sets interest rate and other Fed policies, like quantitative easing. Ms. Yellen is considered a Dove on monetary policy because she believes the Fed has a dual and equally compelling mandate to target both inflation and unemployment, as in current law. Many though would probably prefer a Hawk who would represent someone who tilts toward inflation as being the ever more pressing concern of the Fed, and therefore considers unemployment conditions as secondary to Fed policy. While unemployment is currently our nation’s number one problem, the best reason to nominate Ms. Yellen is not because she is a Dove. It is because she is not an anachronistic ideologue trapped in a 19th century understanding of the role of money in our society. She is the antithesis to Ron Paul and his “get back on gold and get rid of the Fed” religion.
Importantly, Ms Yellen doesn’t believe that monetary policy should be limited to the zero barrier of interest rate policy. Not many people are willing to loan someone some of their money and then pay them to boot. But Ms Yellen understands that in a deflationary environment the Fed needs to seek ways to use monetary policy to stimulate demand even when interest rates are already set at the barrier of zero. Hence, under the right conditions Ms. Yellen is an advocate of quantitative easing. Well, anyone who doesn’t understand that we are in the midst of the right conditions is either dumb, blind, or lying. If not now, when? The Kansas City School District is on the verge of shuttering almost half of their schools due to a severe lack of funds. Washington can simply send the school districts more money and pay for it by having the Fed buy the Treasuries issued to finance the policy. I don’t know anyone who doesn’t want America’s kids to have the best education in the world. So why is Washington twiddling its thumbs while thousand of Teachers continue to get pink slipped?
While President Obama has made a wise choice, I will with-hold rendering judgement on whether the Whitehouse finally gets it, or whether the Whitehous is simply playing politics and throwing a bone to the Progressive wing of the Democratic Party. You see there are two other vacancies on the Federal Reserve’s Open Market Committee that President Obama and his economic advisers have irresponsibly ignored for the last 14 months. If this is stumbling economic luck for us because of politics, then we will know it when President Obama fails to fill the other two Fed seats soon with people who hold similar views to Ms. Yellen. But if the Whitehouse isn’t buying their own snow job on jobs, then they know they need to find Fed Governor’s that will continue quantitative easing rather than those that prefer to end it like the current voting members of the FOMC. After March the Fed will no longer be in the bond market buying up mortgages primarily backed by U.S. agencies. Someone will step in and buy those mortgages. But will someone else be available to step in and buy whatever those people were buying, like junk bonds or Greek Sovereign debt? The Fed and the Bank of England purchased almost $2 trillion worth of U.S. and U.K. debt in the last year. Where does that money come from when they step aside? They have purchased almost as much as China has in foreign reserves. They have purchased more than twice as much as exists in the world’s largest sovereign wealth funds. The only way to replace all of the money is to use leverage, or to resume quantitative easing. Otherwise the world will spend the next year robbing Peter to pay Paul. Please President Obama, show us you get it and put two more Yellen’s on the Fed.
Posted by Michael A. Kamperman on December 16, 2009
The Bernanke led Fed is divided. Some want to render more aid to the economy now. Others wish to withdraw support and head off future inflation. Both sides have agreed in a grand bargain to wait for more data and to wait until they have to make a real decision. The deadline is March 2010 when the current round of quantitative easing is scheduled to end. That is when the Fed is scheduled to end its purchases of Agency debt and of Agency issued mortgages. Until then they neither have to end or extend quantitative easing. The Fed is watching unemployment and capacity utilization. Between now and the end of March the private sector and the state governments will shed more jobs. The predictions by the leading economists are for the real economy to begin to add private sector jobs in the first quarter of 2010. It’s not going to happen. What is going to happen is the federal government will add almost one million temporary jobs to work on the 2010 census. But all of these jobs will end at the end of 2010. The Fed needs to back these jobs out of the next few unemployment reports to get a clear picture of where the economy is heading. Otherwise they may make a decision based on a false reading of economic vitality.
The CPI report showed the core rate of inflation is currently zero. This in spite of the dollar declining gold led rise in November oil prices. That trend has already reversed and the dollar has bottomed in the near term. It’s not because the U.S. is doing so much better. It’s because the veil has been lifted on the euro and the reality of the economic calamity facing countries like Greece, Spain, and Ireland has been laid bare. The CPI reports will soon trend negative. It is only the cold winter that is holding keeping the price of oil from collapsing. It is certainly not economic activity.
The Fed is definitely behind the curve. But it is not the inflation curve they are behind, it is the deflation curve. Prices will keep falling in housing and real goods in search of demand. The banks continue to tighten credit. The Obama Administration has chosen politics over economic substance in allowing Bank of America, Citi Group, and Wells Fargo to exit the Tarp. Despite raising money the capital ratios of all three of these firms fell when the Treasury redeemed its preferred stock. The deleveraging continues and even fewer loans will be lent to consumers and small businesses in 2010, despite the pleas from the President. The Fed needs to look at the big picture and needs to quit waiting and start printing more money ASAP. Manufacturing activity is already slowing down in the U.S., Germany, and Japan. And Christmas sales at the retail level are looking to be weaker than expected. Come January the false dawn of economic revitalization will become self evident and the Fed’s hesitancy will cost it valuable points in confidence. If the Fed had moved today to up their quantitative easing program businesses may have had the confidence to keep workers on and perhaps even to attempt to expand. But because the Fed is blinking employers will blink too. Unfortunately the Obama Administration is not only blinking on job creation, they are blind.
Posted by Michael A. Kamperman on December 11, 2009
In this morning’s New York Times Paul Krugman called on Ben Bernanke to ratchet up the Federal Reserve’s efforts to create jobs by printing $2 trillion. Krugman says the economy needs to create 300,000 jobs per month for the next five years in order to create the 18 million jobs necessary to return to full employment. The Keynesian econonomist ruefully acknowledges the appetite for a full scale fiscal assault on the economic crisis doesn’t exist in Washington and he is turning to Bernanke and monetary policy as the nation’s best option to create jobs. Krugman states “the most specific, persuasive case I’ve seen for more Fed action comes from Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics. Basing his analysis on the prior work of none other than Mr. Bernanke himself, in his previous incarnation as an economic researcher, Mr. Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside.” While Joseph Gagnon is on the right track he underestimates the size and scale of quantitative easing necessary to end the credit crisis. Consider that Goldman Sach’s estimates that every $1.4 trillion worth of government securities the Fed purchases is equivalent to lowering the Fed Funds rate by 1%. Goldman further estimated the Fed Funds rate needs to be lowered another 6% in order for monetary policy to have enough teeth to get the economy moving again. The Goldman study estimates the Fed needs to print $8.4 trillion.
While I think Mr. Gagnon’s estimate is way too low and that Goldman’s estimates are also too low I am thrilled that Professor Krugman has kick-started the debate about why isn’t the Fed printing more money and just how much money does the Fed need to print. My own estimate is we should start with $10 trillion, though it will probably take $20 trillion, and virtually eliminate all of the outstanding U.S. Treasuries. This shock and awe strategy would restore confidence because the federal government would be almost debt free. It would also mean our President wouldn’t have to go to Asia and bow down before his bankers. And, it would free the Congress from concerns about the deficit allowing them to send the states the estimated $350 billion they will need over the next two years to close their budget deficits.
Imagine a world where the too-big-to-fail-too-yet-too-broke-to-lend-banks have no risk free Treasuries to invest in and are forced out on the risk curve with no option but to lend again? It is up to the Fed to take the “hide the money under the mattress” Treasury bonds away from the institutions. We have seen several Treasury auctions this month where the winning bidders accepted zero interest just to know their money was safe. One auction had demand for over five times the amount of Treasuries auctioned even though there was no interest to be earned. If I ran an institution I wouldn’t want my money in a maybe too big to fail bank, or in Dubai or Greece either. For those worried about the dollar if the Fed takes the plunge you can bet the Japanese and the Brits will be quick to follow. We are in a global debt-induced deflationary depression and it is up to the U.S. to lead the way out. Mr. Bernanke, to whom much is given, much is required.
Posted by Michael A. Kamperman on November 24, 2009
I wish I could say we reached the bottom of the decline in home prices. But wishful thinking is no substitute for a hard look at the latest data. In the third quarter 14.4% of all mortgages are somewhere between 30 days past due to being already in the foreclosure process. The WSJ just reported that 23% of all homeowners with mortgages were underwater. Almost 12% of homeowners have mortgages that are more than 20% higher than the value of their home. In October new home starts dropped almost 10% while existing home sales rose almost 10%. That discrepancy is due entirely to the November 30 expiration of the first time homebuyers’ tax credit, which has now been extended. Purchase mortgage applications for homes plunged in November without the aid of the tax credit mirroring the October new home starts. Despite the report from Case/Shiller that home prices rose in the second and third quarter of 2009, a stunning 11% of 2009 home buyers are already underwater on their mortgages. So we enter the fourth quarter of 2009 with one in four mortgages underwater, one in seven mortgages 30 days or more delinquent, and one in ten mortgages to purchase a home in 2009 already underwater. Meanwhile, GDP for the third quarter has been revised down to an annualized growth rate of 2.8%. More significantly the inflation component of GDP was revised down to .5% from .8%. And one in six Americans are unemployed or underemployed and that number continues to rise. Additionally, tightening credit standards by FHA and other key mortgage lenders are further decreasing the pool of potential buyers. Against this backdrop home prices will continue to fall as desperate sellers continue to out number potential buyers. Home prices will not stabilize until supply and demand is balanced.
Most of us interpret stories easier than we interpret statistics. My wife told me a PHD student has moved back to Waco from Seattle to finish her dissertation. She said the job market was so bad in Seattle that a waitress position she applied for had one hundred applicants, mostly from people with Masters Degrees, and only one person received an interview. The 99 people who did not find a job will not be buying a home and some will default on the mortgage they already hold. And really, just what type of home can a waitress buy in Seattle anyway?
Washington will need to provide much more help to the housing market than it has so far. The early rumor is the Federal Reserve is considering extending its quantitative easing program by continuing to purchase agency mortgages in order to keep interest rates low. This would be a positive for housing as will be the recently extended first time homebuyers’ tax credit, which now includes a $6,500 tax credit for those that just sold a home. But low interest rates don’t help those with mortgages underwater refinance and tax credits don’t help unemployed or part-time workers buy a home. A simple solution would be for the federal government to allow everyone who is current on their mortgage to refinance at 4% without a credit report, appraisal, or new title policy. Since the federal government already is on the hook for over 80% of all mortgages this would not significantly increase potential losses to taxpayers. Additionally, lowering payments will lower the number of defaults and the enhanced cash flow in consumers pockets will increase consumer spending. Fewer foreclosures and more jobs will lower the burden on taxpayers, not increase it.
Posted by Michael A. Kamperman on November 3, 2009
The economic recovery is totally dependent upon massive Washington stimulus, both fiscal and monetary. The Federal Reserve is meeting today and needs to expand its quantitative easing program, not end it. Similarly, the Congress needs to come forward with another massive stimulus bill focused on job creation. Credit remains very tight for both consumers and small businesses. For example, recent quarterly data shows credit card solicitation mailers fell from 2 billion a couple of years ago to 350 million. Both small businesses and consumers rely heavily on credit cards to maintain current spending levels. The mildly positive third quarter reading for the economy was the result of zero interest rates, cash for clunkers, the first time home buyers tax credit, and the stimulus bill. Without these measures from Washington the economy would have been decidedly negative. Yet the twin hawks, inflation and deficit, will worsen the depression if their point of view wins out. The inflation hawks are clamoring loudly for the Federal Reserve to detail an exit strategy from its current accommodative policy. The Fed will probably cave and throw these hawks a bone. Well I’m clamoring as loudly as I can for them to print more money and buy more U.S. Treasuries. They should keep on printing until the unemployment rate goes back under 8%.
The Congress should also keep coming forward with massive job bills until the unemployment rate falls below 8%. But neither the President nor the Congress have the political will to do something significant. The reason is the liberals are too defensive about their own policies and want to defend the failed stimulus plan as adequate. You can count President Obama amongst them. The conservatives are too distrustful of government and too anxious to see President Obama fail. That leaves the moderates, most of whom are deficit hawks. In fact Senator Bayh wants to establish a bipartisan commission to balance the budget. This commission made up of republicans and democrats would annually recommend both tax increases and federal spending cuts to tame the deficit. I cannot think of any economic policy scarier than raising taxes and cutting federal spending in the middle of a depression. Yet amazingly that is the glide path Washington is on at the moment.
The inflation hawks and the deficit hawks both have their world view shaped by an antiquated concept of money based on the worship of gold. In the ancient world gold was the best form of bartering for goods and services. Yet its supply was limited. In the modern world paper and paperless money (fiat) backed by the full faith and credit of strong governments is the best form of bartering. Yet unlike gold, printed money is not limited by physical supply. It is flexible and can be expanded or contracted by the government that issues it. In times of an over-heated inflationary economy the government needs to contract the money supply. The inflation hawks agree with this. Yet in times of a debt-induced deflationary depression the government needs to expand the money supply. The inflation hawks fear this because of a misunderstanding of the events surrounding the hyper-inflation experienced by Weimar Germany. The deficit hawks likewise see paper money and government debt as fixed, just like gold. They can’t seem to grasp that the federal government is not bound by the same rules as everyone else because they have the power to print more money. Why is it that the deficit hawks are obsessed with debt that we can print and pay-off at anytime? This depression could end in an instant and your loved ones could have jobs if the federal government would simply start printing money and spending money until the unemployment rate fell below 8% and the private sector economy could then take over. Instead you’re stuck with your jobless college grad kids’ moving back in so they can be protected from the mythical ravishes of future inflation and future federal debt. C’est la vie.
