A Conservative View Of The Economy

We're happy to report that after reciting his modest litany of woe, the president, in an attempt to cheer up the audience, not to mention the rest of the country, which happens to have a large contingent of those worried ordinary folk, declared he was optimistic. Of course, that's easy for him to say: After all, he knows, come what may, his job -- and the perks and paychecks that go with it -- are 100%-guaranteed for the next 11½ months.

Let's not beat around the bush: Who told the president that the economy isn't great?

Someone sure did, because last Monday in Chicago, Dubya came right out and informed an audience of business brass that in contrast to what he has been saying loud and clear for lo! these many months now, the economy isn't going gangbusters; in fact, it's looking a tad peaked.

Why, he even went so far as to admit that jobs, which he had consistently exulted that, thanks to his tax cuts, were growing in glorious profusion, are drying up like over-the-hill peonies left out in an unforgiving sun.

Just to show how thoroughly clued in Mr. Bush has suddenly become, he disclosed in muted fashion that housing had fallen off a cliff, that a lot of mortgages weren't worth the paper they're written on, that oil prices have gone through the roof and that ordinary folk, as they are wont to do, are worried. Golly.

We, personally, couldn't help feeling a heck of a lot better when we learned that Mr. Bush, now that he's alert to the sad facts that the economy may be slowing and homeowners especially are hurting, isn't content with a do-nothing policy. The inside poop is that to keep the feral forces of recession at bay he is determined to push hard as he can to extend his tax cuts, rather than letting them become history.

An admirable plan, whose only tiny hitch is that said tax cuts are not slated to expire for three years. Perhaps it's some genetic incapacity on our part, but we don't quite understand how extending the lower rates beyond 2010 will do all that much to dispel those masses of dark clouds hovering over today's economy, much less what ordinary folk do in the meantime -- except get a bicycle to counter runaway gasoline prices, munch leaves and finger nails to avoid the upward spiral in the cost of food and pitch a tent in the nearest vacant lot (and please don't forget the sleeping bags for the wife and kiddies) after foreclosure.

Still, we're just as glad that Dubya seems resolutely opposed to any of those hare-brained schemes that are being bandied about by irresponsible politicians (forgive the redundancy), whose primary aim is snaring votes from people in a pickle. Even in the novel instances when its intentions are not grounded in greed, stupidity or lust for power, Washington demonstrates an unerring talent for ineptitude.

If breathes there a pure soul so innocent as to be unaware that Uncle Sam is at best all thumbs, we cite the government's efforts to rescue victims of the subprime disaster. As ISI Group's Tom Gallagher and Andy Laperriere relate, back in late August, Mr. Bush, with the usual official fanfare, unveiled a plan to bulk up the Federal Housing Authority so it could help 60,000 borrowers who otherwise might not qualify for FHA financial aid. Well, at last count, nearly a full five months later, that heralded program has provided succor to a grand total of 266 -- that's right, 266 -- distressed borrowers.

None of this, we realize, answers the question of the identity of the babbler who spilled the beans on the state of the economy to the president. We won't keep you in further suspense: We have every reason to believe it was Ben Bernanke, chairman of the Federal Reserve.

That kind of raises a question, we suppose, since Mr. Bernanke has been nearly as much in the dark on the state of the economy as Mr. Bush. More properly, it changes the question to: Who told Mr. Bernanke?

And, gentlemanly as ever, Ben provided the answer himself in a speech in the nation's capital last Thursday -- the market did! Or, to quote the chairman's somewhat circuitous confession verbatim: "Financial market conditions have been sensitive to the evolving economic outlook."

Too bad Mr. Bernanke didn't take the market's message to heart earlier. Conceivably, as a recovering academic he was too conscious of the estimable Paul Samuelson's famous formulation that the stock market had predicted 11 of the past five recessions. Still, Ben should know, that's still way better than the performance of most economists.

MR. BERNANKE COULDN'T have been too pleased with the markets' second thoughts on his vow to take decisive action if things go from bad to worse. And we don't blame him for a minute. Gee whiz, what do those pesky investors want, anyway?

The chairman, looking most funereal, flexes his biceps and flaunts his new machete-wielding stance. The crowd goes wild and the market takes off late Thursday afternoon, obviously goosed by Mr. Bernanke's words and manner both. For he was plainly betokening a half percentage point cut in interest rates when the Fed next meets in solemn two-day conclave, beginning Jan. 29 (breaking only for the traditional jolly lunch). What's more, he all but promised kindred action as needed in the months ahead.

The betting among Street savants is that before Ben's good right arm gets sore from swinging that old machete he'll have sliced rates from 4.25%, where they now rest, to less than 3%. Just the kind of stuff the market loves to hear.

So no doubt Mr. Bernanke went home happy Thursday night, only to have the rug pulled out from under him on Friday, when those fickle investors took it all back and stocks tanked across the board. So what happened to turn sentiment from roused to roiled?

Possibly, a little reflection (which is about all most Street denizens indulge in) revealed that the Fed's whacks out of rates last year provided a quick lift to stock prices, followed by renewed queasiness. It may have been enough, in this instance, to raise doubts anew as to just how much wallop the Fed still packs in the rate-making arena (put us down as believing "not very much").

And it hardly helped sustain the uptick in investor mood when the New York Times reported that Merrill Lynch stands to take a tidy $15 billion write-down, nearly twice the original official reckoning, and a heap more than even the Street's upwardly revised estimates have anticipated. If nothing else, it's a painful reminder that the great credit squeeze, easily the most malign and encompassing one since the Depression, is still very much with us.

The hard truth is, as the Merrill disclosure and the shotgun wedding of Bank of America and the putatively bankrupt Countrywide Financial furnish lugubrious evidence, the hemorrhaging among lenders of virtually every description and everywhere is far from stanched. Something on the order of $100 billion in write-downs have been grudgingly owned up to by the red-faced banks, and it'll likely be years and another $200-$300 billon before the dreary process sighs to an end.

It's a running, virulent wound, and the fragile financial system and the economy are destined to continue to suffer from it for a long, long while. And despite seizures of vertigo -- Friday's plunge is only the most recent -- the stock market, we fear, has yet to face up to the full measure of the damage being wrought and to be wrought.

The big washout we alluded to a few weeks back has still to come and remains a necessary prelude to any semblance of stability in the equity market.

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A GOOD FRIEND OF OURS who keeps a sharp eye on the investment scene and has been more than a fair investor points out that besides wretched credit conditions, slowing global economies, gathering inflationary pressures and currency debasement, the spectacular run in gold to $900 an ounce owes something to the burgeoning popularity of exchange-traded funds that specialize in gold. The ETFs, it emerges, are required to hold bullion to back up their shares. As demand for the latter mounts, so inexorably does demand for the metal.

Link.