It's NOT the Economy, Stupid: It's the Mess in Washington

One economist predicts the Fed could go as far as buying stocks and real estate to boost the flagging economy.

Michael Pento, senior economist at Euro Pacific Capital in New York, envisions a scenario in which the Fed, desperate to get money into consumers' pockets, starts buying S&P 500 stocks and real estate in an effort to boost asset prices.

The Fed so far has indicated only a switch from mortgage-backed securities into Treasurys, a move aimed at driving interest rates even lower and facilitating the flow of credit, even though low loan demand has largely thwarted the effect of the drop so far in lending rates.

"What is the real difference?" Pento says. "In one instance they're trying to bring down borrowing costs. Maybe if they buy stocks they'll really put a dagger in the heart of deflation. People will see asset prices rise. They'll start spending money."

Pento says "I hope and pray" the Fed does not take that approach, but wouldn't be surprised given that the central bank and Chairman Ben Bernanke "are not limited to purchasing assets from banks but can direct their purchases directly at the consumer in an unlimited fashion."

At least one Fed expert sees such a scenario as unlikely. The only other time a global central bank bought stocks was in the 1997-98 Asian debt crisis when Hong Kong's monetary authority got in the equities business.

"The biggest part of the problem is not monetary. It's not a problem that central banks can solve," says Allan Meltzer, a Carnegie Mellon professor and one of the country's foremost historians on the Fed. "They're certainly not going to be buying real estate."

Meltzer says that even the 2010 election may not cure Wall Street apathy, which he thinks could persist until the 2012 presidential election.

"We'll have two years of stalemate is probably the most likely outcome (this year)...unless the president wants to move to the center the way Bill Clinton did," he says. "This president doesn't seem likely to do that, but politicians surprise you."

Indeed, there are some who think the economy is beyond political help.

"The problems of the economy transcend politics altogether," says Walter Zimmerman, chief strategist at United-ICAP in New York. "It transcends ideology, taxation policy, whether we have a (national) health care system or not."

"What panacea do investors see arising on the scene from a Republican takeover of the House?  We're already on an unsustainable course." adds the libertarian Pento. "It's going to be gridlock, which is better than what we have now. But do I think it's going so solve all our problems? Absolutely not."