In the October Outlook Bill Gross is describing why he has more business running for President, than anyone in the Democratic Party, where Economic Policy has become a non-sequitur; Fiscal responsibility is taking hold again in the Republican Party, Bush talks about it, and who can tell with that collection of painful expressions he used, where the man is being sincere or not, when he chides the Democrats on spending? The ugly step-child is turning into Cinderella, but then the Democrats have squandered every other missed opportunity, why not this one too?
....PIMCO professionals were attempting to describe to high-ranking Treasury and Fed officials the near-frozen commercial-paper markets and the draining confidence of bond and stock investors worldwide. It was Thursday, August 16. Stocks had closed down 210 points and were expected to open hundreds of points lower on Friday. The country’s largest mortgage originator, Countrywide Financial, was rumored to be in liquidation mode (it survived that crisis). This was to be Ben Bernanke’s first test, an opportunity to prove that he and his board of governors knew "something" as opposed to "nothing." Pass the test he did, cutting the discount rate the next morning and calming markets in ensuing weeks. When Bernanke’s Fed met officially on September 18, it acted again and joined a convoy of global central bankers maneuvering to restore a semblance of normalcy to credit and equity markets. So far, so good.
There is a great deal of conjecture, about the role of the stock market and the economy. At one extreme are impassioned bloggers like Jim Willie, http://www.goldenjackass.com, who describes the U.S. system as a Fascist business model and refers to it as the Mussolini Economy. The political Fascism of the Bush administration, and the Economic model, seem to dovetail together nicely. I can make that case myself, but Eric Prince will probably describe it more eloquently in his testimony on Capitol hill.
The modern financial complex has morphed into something unrecognizable to many astute market veterans and academics. Bernanke’s fellow governors and Hank Paulson’s staff at the Treasury spread their roots during an era in which traditional banking activity – lending out deposits backed by a certain level of reserves – was the accepted vehicle for liquidity creation. Remember those old economics textbooks that told you how a $1 deposit at your neighborhood bank could be multiplied by five or six times in a magical act of reserve banking? It still can, but financial innovation has done an end run around the banks.
Everytime the economy has gotten this frothy, political mischief was not far behind. Where was Nixon without a slush fund, the Contra's without the S&L Crisis? One can draw parallel lines to the Economic bubble, and the rise of the Republican party, since Nixon. It may be that Clinton's biggest mistake was leaving George Bush a healthy economy, with which to wreak havoc. There are two parts to the problem, one is, the decoupling of the economy and the stock market, which is a process underway for a number of years.
Bernanke’s Fed may be as opposed to targeting asset prices as was Greenspan’s, but housing and stock market bubbles are birds of entirely different feather. 1987’s equity crash and its negligible effect on economic growth as well as Nasdaq’s fall from 5000 to 1500 in recent years, which led to a very mild investment led-recession, cannot be the textbook examples for Fed asset price policy today. Wall Street, despite its increasing influence in America’s finance-based economy, is not Main Street; and stock prices do not dominate the spending habits and confidence of its consumers in the same degree as do home prices.
A few years ago Greenspan talked about the "wealth effect", which is the support that consumers received from a bullish stock market. Bill Gross has selective amnesia here, but what politician doesn't?
The point is, he's probably right about the disconnect, which raises some interesting questions about what Wall Street is all about, and if you are thinking MIC, Blackwater, Halliburton, you are probably not too far off. However funding Wall Street at the expense of Main Street is not what he is all about.
The same 4¾% rate is not and cannot be "neutral" for both sides in today’s U.S. economy. Whereas current yields are not restrictive for investment grade corporations with global opportunities, they are far too high for homeowner Jane Doe and two million of her neighbors facing higher and higher monthly payments on adjustable rate mortgages. Should Bernanke put on a brave face and freeze the elevator and rates in mid-descent, he risks exacerbating a housing crisis in the making. Yet, should he favor the homeowner over the corporation, he risks reigniting speculative equity market behavior, and – in addition – a run on the dollar.
And further he addresses the role of (his) Treasury Secretary to deal with the housing problem. Now I find it a bit odd that the Treasury Secretary should become involved in a housing bailout, but then I also find it odd that Blackwater is under the control of the State Department, and Condoleeza Rice?
But Paulson’s attempt to assist ailing homeowners will be complicated by the free-market laissez-faire policies of Republican orthodoxy.
Savor those words, Republican Orthodoxy. In a conventional usage of the term it means a basic principle, or ideal, which must be compromised by the real working model of the organization, but which is held in reserve as scared. (my definition)
Republican Orthodoxy means Fiscal Conservatism. Up until this moment in time only the Democrats have proposed any Fiscally Conservative measures, such as the now gone and forgotten PayGo Legislative Package Nancy Pelosi wanted to pass.
....their options are limited by Republican political orthodoxy, the receding willingness of the private sector to extend credit, and a still exuberant global economy. What do they know? I suspect at the very least they know they’re in a pickle, and a sour one at that.
Now as the moderator in this imaginary debate with candidate Gross, I have to ask some questions
Moderator: "Sir, is there any chance that either party will try to cure the deficit, and restrict spending, and at any rate, should they try?"
BG: "The difficulties which any sudden spending changes,would entail, which would cause greater volatility, should be considered.
Mod: "That's a mouthful sir."
BG: "We need to put the money where it will do the most good, that means helping homeowners. Over half of GDP is now government spending. We can reeducate Wall Street, but it will take some time."
I am of course putting words in the man's mouth, and probably not the right ones, but I sense he is closer to the Democratic party on this matter, than he is to the Republican Orthodoxy, or the Fascist Business model, which was not mentioned. Government spending takes away from private spending, that is textbook economics. It could very well be that the MIC is siphoning spending, which is causing problems with the commerical paper market, and we simply aren't facing up to the facts.
Helping homeowners would inflate the Wall Street bubble, to even further extremes. Are Main Street and Wall Street on a different course, and is the only solution a political solution? Is it possible that the future of the economy depends on the success of the anti-war groups within the Democratic party?