The Clueless Engine That Couldn’t

[Daveparts]

The Clueless Engine That Couldn’t
By David Glenn Cox


I approach this whole subject with trepidation and by god that’s probably the most honest thing you’re going to hear about the stock market all day long. The media is soft pedaling the issue, they imply Wall Street was reacting to an overseas sell off when it is Europe and Asia reacting to our declining economic health. They ask themselves, “Is President Bushes sudden interest in an economic stimulus package because he’s a swell guy who just wants to say thanks or because he’s missed the curve ball twice and now fears the fast ball for strike three.”

The Federal Reserve board by anyone’s assessment is at best benign and at worst a disaster. Either they are too slow to act or act too tepidity, and then appear to respond to pressure from the markets, to follow when their job is to lead. Like Homer Simpson, a red light goes off and they push a button at random and wait to see what happens. They don’t understand the problem, the nature of the illness, they want to apply the salve of tax rebates or balm of rate cuts. That somehow if we treat the symptoms of the illness, it will become discouraged and just go away.

But it is not just one illness, The Fed emergency rate cut of 75 basis points has made it possible for the battered financials stocks to become more profitable even if for just a day or two. The Fed cut means banks can now borrow more money less expensively but it doesn’t change the fact that the banks hold billions of dollars in bad loans. The boon for the financial stocks might have averted a Wall Street melt down today but only deepens the bottom. Already, Wall Street is clamoring for 50 more basis points and assuming that it gets those, then what?

The illness is too much credit and too many bad loans, so could the cure be more credit more cheaply? The forecast is for a further contraction in the housing market meaning lower home values and less demand for mortgage credit, a double whammy, your collateral is worth less and your revenue source is in trouble. Loss of collateral value means more write downs, loss of revenue source means no opportunity to offset the write down losses.

Every time the Fed cuts rates oil prices rise, rate cuts are inflationary, even the Fed admits that. The rate cut may have rescued the financials but by noon the Euro, the Yen, oil and gold were back on the rise. Half a dozen large banks verses 300 million Americans that must buy gas and food and pay the mortgage and the credit card bills and remind me again, what was the reason that got the banks into trouble in the first place? Oh yeah, the inability of their customers to pay their debts!

The President proposed a 150 billion-dollar stimulus package on Friday and the response from the Asian and the Europeans was a market meltdown. Tuesday the President suggest that 150 billion was just a suggestion that he’s actually open to a larger figure. Why sure, what’s it matter when you’re just printing the money anyway, 300 billion 450 maybe? That’s the funny peculiar part of compassionate conservatism, if you give the middle class a nickel you have to give the corporations ten bucks. So if you give the banks millions with a Fed rate cut then what do you give to the middle class? Put on your conservative thinking caps. (Yes, there is to such a thing) The answer class is, as little as possible. You see when the middle class have money they will behave irresponsibly with it. They don’t have the fiscal discipline of the Bush administration or the Wall Street bankers.

I think you see my point, the number one problem with America’s economy and financial system is the Bush administration its self. “The Little Engine That Could” might be a great motivational tool but as a monetary policy it’s a fools paradise. Can we double the amount of currency in circulation without adversely affecting the economy? “I think I can, I think I can,” Can we give out tax cuts while spending billions more than we take in? “I think I can, I think I can,” And when the little engine is proved wrong it chugs to a stop clueless.

They haven’t even broached the subject of a long-term cure, because they’re clueless. The treasury is run by academics used to giving homework and not doing it. So certain that they have all the answers that they don’t study for the test and the results speak for themselves. Jugglers can’t think about what they are going to do after the show they must concentrate on the balls in the air. This is the simple explanation of why the Bush administration thinks so short term, they’re struggling to keep all the balls in the air and when one drops trying to pretend that it was all part of the act.

The Federal Reserve is guilty as well, but only in the same way that you can’t blame Moe and Larry and then say it wasn’t Curly's fault. FDR during the New Deal had long and heated debates about what to do with the Federal Reserve and the current conservatives have made FDR’s liberal point. If you take away the independence of the Fed you end up with the clueless dog and pony show that we find today. I know that there are millions of you out there that want to burn down the reserve banks and hang the commissioners from lampposts. But the Federal Reserve is a tool like a hammer and if you misuse the hammer and hit your thumb it’s not the hammers fault.

The idea was that the people who own banks and make a living from banks have a say in monetary policy. This argument has been going on since the days of Jefferson and Adams either government control or private control of monetary policy. The argument against government control was that they didn’t hold a vested interest, that they would flood the market with cheap money just to get reelected. Does this sound familiar to you? By leaving control in private hands it would be beyond political influence and in control of those who stood to lose everything if they behaved irresponsibly.

Roosevelt sided with private control under a regulated environment. Fearing that the banking interests would move to scuttle any New Deal plans otherwise, as well as a genuine fear of coup de’ tat. The world has changed a lot since 1932 the CEO’s of the banks have no more vested interest in the well being of the bank than a government bureaucrat. Their job it to make as much money anyway they can, if you were a bank CEO which political party would you support? If the bank loses a fortune the CEO walks away in disgrace with only his millions left to console him. Bernanke’s hand in glove relationship with the administration means the worst of both worlds. A Federal Reserve that parrots the bureaucrats and bankers with no vested interest beyond the next quarter.

A monetary policy based on faith in theories administered over by academics. A stock market attuned to making money by either rise or fall, making their money either way. The politics of greed, the faith of carnivores administered over by bureaucrats with no stake in the financial loss. If you swing the hammer and hit your thumb then get a bigger hammer and try it again.

P.S. I had this article already to post when the President topped himself with the announcement of the President’s financial literacy council, bringing together the financial, faith and non-profit world to educate you in financial literacy because the President believes that this all your fault!