The formation and execution of economic policy this week entered a new level of chaos, complete with good news, bad news, and silly news.
The best news: two different Federal-deficit study groups came up with the same basic solutions: cap spending and revenue at a sensible level of GDP, broaden the tax base by cutting special exceptions, and cut tax rates. Spending: in Alan Simpson’s line, “Harpoon every whale in the ocean.” The people are way ahead of political leadership, the average American eager to implement any deal like these two.
Then, the chaotic: QE2 for now is a complete and counterproductive bust: 10-year T-notes have blown near 3.00%, and mortgages to 4.50%. Only a handful of people think they understand QE, and the more Perfesser Bernanke has talked about “raising the inflation rate,” the more he has spooked the bond market.
Trader-think: If this guy is printing money to buy bonds and push inflation back up to 2.00%, what am I doing buying 10-year bonds at 2.50%? What if his calculations have a little oops-a-daisy, and he over-does it? On the other hand, this mad scientist’s QE might work and rescue the economy… I bought all these bonds out of fear of deflation and double-dip, not because we’d be saved. If he wants to buy, I’m selling.
The economy: we’re right back where we were last winter, quarreling over every speck of data, optimists finding recovery, pessimists not, but it’s clear to all that the double-dip risk is on hold. Retail sales outperformed, rising 1.2% versus the .7% forecast (incentive-pushed autos), but industrial production was flat in October.
Core CPI was also flat, the year-over-year 0.6% “inflation” the lowest measured since stats began in 1957. At a rate so low, many sectors of the economy are forced to pay back debt with dollars more expensive than the ones they borrowed, a crushing deflationary weight, but the hardheads think zero inflation is cool.
The foreclosure-document affair has taken a very good turn. State attorneys general now no longer preoccupied with re-election are backing away from all of their EEK! and Villains!! Digging by the entire US news media has failed to find a supply of people wrongly foreclosed upon, nor can they find loans foreclosed by the wrong bank.
Lying in court is a bad thing and will be punished, and procedures will be tightened, but the show has now morphed into an attack on the pre-foreclosure process and loan “mitigation.” Hooray! Servicers and the Treasury trumpet hundreds of thousands of workouts, but we are filing 3.5 million foreclosures each year, completing two million, and another five million loans are in hopeless delinquency. Everybody out here knows that lost souls asking loan servicers for help will get slow, contradictory, and forgetful treatment from uncaring and ill-trained personnel. Still: “Your payments have to be late before we can talk to you.” Grrrrr…. “We’ll suspend foreclosure until our mitigation decision.” Three months later, with no notice, you learn that they dropped the gavel.
National housing policy: “Stand quietly in line in front of that steamroller.” Anger is rising, and civil disobedience is near. This week in Denver, a 50-year-old man told the evicting sheriff to go away, and was then taken from his foreclosed home in handcuffs by a SWAT team. I don’t think the country will accept that kind of scene for long.
Back to the Fed. The Republican leadership in the House and Senate this week delivered to the Fed a formal demand to stop QE2 (best I know, nothing like that has happened before), and they are joined by plenty of confused citizens of both parties. A nicely dressed group of reactionary economists made the same demand, but that’s old hat. Their basic theory: don’t do something, just sit there. Good heavens… doing things is risky. Exactly the same voices objected to FDR and his relentless tries of remedy after remedy, but FDR made clear an overriding priority: the economy.
The Fed is the only agency of government to have acted effectively in this emergency, with innovation and courage. Although the emergency is clearly not over, the forces of ignorance are trying to shut it down. Don’t join them. Please.