The Fed’s Latest Round of Quantitative Easing

I read the following in last weekend’s Wall Street Journal, “Heard on the Street”, p. B16, October 9-10, 2010 …

Being a bear with a capital “B” is tough when the Federal Reserve is juicing markets. The prospect of more extraordinary easing measures Friday pushed the Dow back above 11,000.

But that hasn’t deterred David Rosenberg, Gluskin Sheff’s chief economist.  While the National Bureau of Economic Research (NBER) has said the recession ended in June 2009, Mr. Rosenberg insists we are still in a depression.

That view is based on a less-technical measure of downturns than that used by the NBER.  Mr. Rosenberg says a recession is when government tries “to stimulate the private sector.” A depression is when government tries “to sustain the private sector.” The latter, he argues is very much the case today.

And for those who question the absence of 1930s-style bread lines, Mr. Rosenberg counters that today, thanks to food stamps and other government-assistance programs, “the soup and bread lines are in the mail.”

He makes a good point.  Due to the recession, 1 in 8 Americans now receives food stamps.  If you were to count all those who are eligible, but for whatever reason do not collect, the number is something like 1 in 5 Americans.

Let’s see whether the Fed is successful in stimulating the economy with lower long-term interest rates.  It might work, but it might not.  Personally, I’m not convinced it will.  The Fed is trying to pull a rabbit out of a hat.

Amongst other things, the Fed is also trying to juice housing prices, and I think the juice will help prices to bounce somewhat.  But a dead cat will bounce only so many times.  Eventually, a dead cat is a dead cat.  Don’t get me wrong … Housing will eventually recover, but don’t hold your breath waiting.  It might be a very long time.

And as for the economy, it too will recover, but only when the fundamentals allow it to recover.  Until then, there’s a fair amount of debt that needs to be flushed out of the financial system before that happens.  In the meantime, and to that end, mortgage refinancing might be in order.

Opposition to the $700 Billion Mortgage Bailout

The more I read, the more I’m disgusted.  The Bush administration wants this bill passed quickly, without Congress (both Democrats and Republicans) attaching appropriate conditions to it.  And yet, President Bush continues to expand the original scope of the legislation: agreeing to the demands of lobbyists who are now scrambling to get a piece of the action.  Foreign banks want in, credit card companies want in, banks want it to apply to commercial loans, etc, etc.  Vultures!  Where does it stop?  What happened to the original goal of the plan to resolve the residential mortgage mess contributing to the financial instability?

A bill of this magnitude should not be signed lightly.  It will have a significant financial impact on our nation today and for generations to come.  Financially responsible members of Congress will do right to question whether this bailout plan is appropriate.  I believe there are better alternatives for spending the $700 billion, without rewarding the people who created the mess.

The bill, as it stands today, will essentially reward those firms whose bets did not payoff.  Without the pain of a hard lesson learned, these same firms will create yet more troubles in the future.  In fact, they will be more emboldened to take risks in the future.  After all, why should they care about the risks if they believe that Uncle Sam will help them out in a pinch?

Enough is enough.  It’s time we stopped paying attention to the threatening bullies on Wall Street.  They hold Congress and the American People over a ledge of fear.  But in fact, they are the biggest bunch of cry-babies I have ever seen.  First, they wanted deregulation, so they could be unfettered in their ability to make money.  And now they are asking for a bailout when their methods have proven to be disastrously wrong.

It is important to remind the bullies on Wall Street of the old saying “Live by the sword, die by the sword.”  More appropriately, “Live by the capital markets, die by the capital markets.”

I have so much more I can say about this bailout plan, and I understand the further downside risks of doing nothing.  But my message is clear, and my position is still the same.  No bailout!