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President Bush we now know is
“Damn Certain”. Alan Greenspan, retired Fed Chairman now turned
economic rabblerouser released his new memoir on Monday that could have
been subtitled “Damn Certain too”. Ben Bernanke, the current Fed
chairman and according to the two previously mentioned gentleman is doing a
fine job, possibly a heckuva one, will no doubt publish his account one day
of what is happening to the economy with a subtitle, “Damn Certain As
Well”. These are, it seems, the only three people in America
certain of anything and if that is the case, we are in more serious trouble
than previously thought.
Much like the parallel universe often suggested in science and its
fictional precursor, an apposite economy exists today and seemingly right
under our noses. The questionable existence of two economies lying in such
close proximity yet unaware of how the other operates is one of the most
troubling problems for this Fed.
(I am writing this on the Tuesday morning prior to the Federal Reserve
meeting where the safest economic gamblers have priced in a quarter point
rate cut and a fifty basis point cut at the discount window and have already suggested that the
remaining two meetings of the year will also see additional rate cuts by
Bernanke. These hopefuls, a group of market mavens who would like to see the
Fed take it down even further, because four years is long time to wait.)
An apposite economy lives on both hope and fear. Those who hope are
not satisfied with the single digit growth of the Wilshire 5000, the total
market index that is up, despite all of the news otherwise, 4.1% for the
year. The Dow is up 7.5% for the same period. This is a respectable gain and
something that should be greeted with relief.
Those markets should be trading much lower. As the financial arm of
the market begins reporting their earnings, offering the world the first look
at how some bets turns sour even when the in-house economist suggest
otherwise, you can expect those year-to-date returns to tumble even further.
This is where the fear side of the apposite economy enters the foray. Oil
costs a lot. Houses are getting more expensive – not in terms of asking
price but in the cost of money to borrow. The ripple effect of this downturn/correction/adjustment
will force consumers to buy less. This will force some – not all jobs to
be cut. This will lead to some unexpected inflation and some recessive
economic reactions.
These problems will not be fixed by a rate cut. It may seems as if the
Fed is attempting to get in front of yet another adjustable rate mortgage
rebalancing next year but you would be wrong to believe so. In fact,
I’m not sure the Fed can fix this without some painful changes in
consumer attitude. It should be noted, in case you have forgotten, it takes
over six months for any rate cut to make its way into the marketplace. By
then, it will be too late.
Mr. Greenspan has suggested that he had nothing to do with the current
situation. Stewarding the economy during the great expansion of the Clinton
years was easy. No one paid much attention to the Fed as surpluses were
built, markets surged and we all felt wealthier. When the political tables
turned, Greenspan was hopeful.
The lifelong Republican warned Mr. Bush about a government with no
debt suggesting as he did, that such a thing is not a good idea. His
inability to see into the future, he now writes, was not necessarily a
shortcoming on his part but an offer to seize the opportunity of smaller
government. He was unable to stem the administration’s raid on the
piggy bank, blessed by his silence by the bunch Kurt Vonnegut once called the
“C students from Yale”. That leaves Mr. Greenspan, despite his
ruminations otherwise as much to blame as those who spent our way into this
problem.
Mr. Bernanke or as his legacy might one day portray him, poor Ben, is
left with a mess beyond a single agency’s ability to clean-up. Wall
Street isn’t happy. Main Street isn’t happy. And no one seems to
be able to find the right formula to feed these colicky economic
infants.
Let it be Mr. Bernanke – although by the time you read this, he
will have already made some decision. Let the economy shake itself out. There
are less than two million households in trouble – fewer than 5% of the
total. The same percentage of businesses will feel the pinch but the sting
will not be enough to take the whole of the market down. You can still borrow
money. You just have to prove you have the ability to pay it back.
I expect, that if Bernanke leaves things alone, that it will take a
year to eighteen months for the wrongs to right themselves. If he
doesn’t, and we all know he won’t, he will be writing in his
memoir one day: “it wasn’t my fault, it was…”
Paul Petillo
www.BlueCollarDollar.com
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