Well folks, there is nothing quite like watching the fear among "policymakers" morph into panic in AN ELECTION YEAR as the stock market tanks and recessionary signals intensify to the point where even the most wilfully obtuse -- ie., the FED -- can no longer deny them. Normally, as election time approaches, the Administration gets on the ball a lot faster than has been the case this time around. We attribute this slow-motion awakening to the President's preoccupation with national security and foreign policy matters. For this he can hardly be faulted. It is the responsibility of his economic team to warn him, in no uncertain terms, when economic turmoil impends. Our guess is that his team, while performing a lot better than the bury-thy-head-in-the-sand FEDERAL RESERVE allowed itself to be lulled by FED reassurances and wishful thinking to misperceive the gravity of the crisis in the banking system and the promise this held for a serious credit contraction. Our impression is that the Treasury Secretary has been alert from the gitgo, given his prior private sector experience. As for other policymakers and the bureaucracy, well..... The new "bits and pieces" (see our original analysis, "Bailout By Bits and Pieces")consist of these: The most critical measure is, of course, the FED rate cut,and the LIQUIDITY INJECTION SAID CUT implies. Up until now, the rate cuts have not really produced any meaningful expansion of liquidity; this cut, and the ones we expect will be following shortly, WILL PRODUCE LIQUIDITY. This DRASTIC REVERSAL OF FED POLICY CONSTITUTES THE PLACING OF THE INDISPENSABLE SAFETY NET BENEATH BOTH THE ECONOMY AND, IN DUE COURSE, THE FINANCIAL MARKETS. As such, its importance can hardly be overestimated. We are hopeful that the FED will continue on this path in order to head off a deflationary price movement which could potentially create a near-insoluble liquidity trap. We are reasonably optimistic on this score. It is lucky that the real estate bubble burst and the sub-prime collapse occurred so close to the presidential election, and this is NO JOKE. The second important bailout bit is the broadening of the size of mortgages Fannie and Freddie can purchase and/or guarantee. Since Fannie and Freddie are, to all intents and purposes, an extension of the government, their widened amplitude constitutes a de facto extension of government guarantees to more mortgage loans. This will ultimately reduce, over time, the downward pressure on house prices and should contribute to containing the housing depression to some extent. The implication for the current mass of securitized mortgages is quite modest, but nonetheless constitutes a positive. This new bit of bailout may be extended further in the not distant future as the economy grinds lower. The tax rebates will also have a positive impact. Our overall response to all of this is: better late than never. We expect more relief as election time moves closer. |
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