ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Friday, January 18, 2008

Bernanke is an Idiot

This Reality Check from CNBC's Diana Olick is great:

Stimulus Package Won't Do Very Much For Housing
Posted By:Diana Olick

I’m very glad that the chairman of the Federal Reserve thinks the economy needs a stimulus package. Yep, the idea of a potential tax rebate check is a great thing for those of us who are having trouble meeting that monthly gas bill or paying for the sundries at the Stop and Shop.

But what in the name of credit crisis, Batman, does that have to do with the fundamental cause of the spiral in this current economy?? I’m talking, you guessed it, about my little beat: housing.

Not only will 600 bucks not make a particle of difference for a homeowner stuck with a mortgage rate that just reset from 2 percent to 8 percent, nor for a potential home buyer looking for that little extra bit of courage to jump into a contract for a brand new home.

Until the housing market stabilizes, builders start building again, and home prices find their feet beneath them, consumers aren’t going to budge, and I don’t just mean buying houses. I mean spending money on houses and the things that go into them.

At the same time as the Fed Chairman was using all that blunt language about a stimulus package, I received a new study from the mortgage bankers in my email box. It reports that “the mortgage industry modified an estimated 54,000 loans and established formal repayment plans with another 183,000 borrowers during the third quarter of 2007.

By comparison, foreclosure actions were started on approximately 384,000 loans.” So the mortgage industry is trying, and stemming the tide, but certainly not all of it. 62 percent more loans went into foreclosure than were modified. And despite all these efforts, by the industry and the federal government, the ratings agencies continue to downgrade the value of mortgage securities, causing massive losses on Wall Street.

I’m not saying I’m on the side of a government bailout, because I’m actually not. I’m a homeowner who actually read the terms of my mortgage, and questioned my lender over and over on each point. But if the government is going to step in, how about coming up with something better than a little post-Christmas cash that won’t even buy a month’s worth of groceries for a family of five.

Watching Kudlow & Company last night, you could see that all of the panelists had lost confidence in Bernanke. They all pointed to the fact that his testimony yesterday was terrible and Kudlow remarked that it would be better if he didn't open his trap, since every time he does, the market takes a nose-dive. And all of the panelists agreed (even those that did not want any rate cut) that if a rate cut was a likely action by the Fed, Bernanke should make it immediately and decisively, not the cautious gradualism that he has demonstrated in the past.

The Fed delaying any action until the end of the month only means that the market and economic actors will hold off economic activity until that date. If you're a business interested in borrowing money for a capital project, do you pull the trigger now or do you wait until the end of the month when you expect the Fed to cut rates by 50 basis points? If Bernanke comes out with a 25 basis point at the end of January and announces that future cuts are in the making, this will be a very long year.

Ideally, the Fed should cut the funds rate 75 or even 100 basis points immediately and indicate that they will keep an eye towards inflation throughout the year, signaling that the current rate is likely only available in the short-term.

And for Bernanke to throw even partial support behind increases in Food Stamps and short-term unemployment insurance is just astounding. Panelists on K&C remarked that Bernanke may have backed that up with the expectation that Congress wouldn't be able to do anything and he could then point to a recommendation which they didn't follow, shifting the blame to them.

Want an economic stimulus? Here's my plan:
  1. Cut the corporate tax rate immediately to a rate that is comparable to the rest of the world - perhaps the 12.5% rate in Ireland is a good target.
  2. Cut and simplify the income tax rate to a two tiered system or immediately enact Fred Thompson's tax plan
  3. Eliminate the Capital Gains tax
  4. Announce that ANWR is open for exploration
  5. Ease the Fed Fund's rate by 75 basis points immediately.

Alas, it's unlikely that any of that could be enacted in a decade, much less in a month.

Cramer was right... "They know nothing."

Your Co-Conspirator,
ARC: St Wendeler

Comments (4)
Monterey John said...

I was with you to the cutting of the rate.

One of the major reasons oil costs c$100/bbl is that our money is sinking like a stone. One of the reasons for the latter problem, it would seem to me, is that foreign investors do better elsewhere. Just my humble guess, I did not go to Princeton and study economics, but I DO understand that when I put money in the bank that I like to earn more rather than less.

As for Bernanke, yep, he should shut up. He obviously does not think a "stimulous package" is going to do anything either. So he mouthed some stupid platitudes. When someone in his position does that... you can hear the bodies hitting the pavement on Wall Street.

St Wendeler said...

$150 billion dollar "injection" into our economy would have little effect.

The price of energy is the main driver of inflation - and the recent Energy Bill did little to stem the tide (other than to make one of our food staples an energy crop).

Inflation is a form of a tax... However, if one has to choose between recession and inflation, I'll take the latter in the short term with the hopes that it will reverse course in the long-term.

The problem with our economy is a specific problem with housing and mortgage lending. Cutting the funds rate would eliminate that problem. Waiting to implement the first of several gradual cuts at the end of January is the worst of all possible solutions. Either don't cut at all or cut decisively - NOW. Don't wait until the end of the month.

If the Fed cuts by only 25 or even 50 basis points at the end of January (at the same time signaling a willingness to cut further in the future) , we'll surely end up with stagflation. If you don't like a recession, Bernanke's current path will achieve that along with inflation.

BTW, I'm not a Princeton economist either...

Anonymous said...

"The price of energy is the main driver of inflation"

yeah, i'll say you're not a princeton economist. you don't even understand what inflation is. back to school, my friend.

St Wendeler said...

The price of energy isn't one of the causes of this year's inflation?

Perhaps if you only look at "core" inflation (which doesn't include food/energy).

But, energy is a cost which consumers and businesses alike must consume as inputs. And when inputs increase for businesses, they increase the price of the outputs to make up the difference.

(Or do you think they eat the increased costs? Is that why FedEx, UPS, etc impose a fuel surcharg? Is that why airlines are increasing fares? Are these not inflationary effects of energy?)