The Guest Blog

Busch: Questions, Questions, Questions


Yesterday, President Barack Obama reached into his bag and pulled out a gem.

Politico reports that President Barack Obama said it was “shameful” for Wall Street to walk away with $18.4 billion in bonuses last year in the depths of a recession. "Leaning his elbows on his knees, with his mouth clenched, Obama lashed out at the executives and employees who were found by the New York state comptroller to have earned the sixth largest bonus haul on record last year. “That is the height of irresponsibility. It is shameful. And part of what we’re going to need is for folks on Wall Street who are asking for help to show some restraint, and show some discipline and show some sense of responsibility.” All of which is true and all of which gets the Lou Dobbs crowd fired up.

I would suggest that as President Obama Gomer Pyles (Shame, shame, shame) the financial sector, he should take a moment and ask this question: why were there no conditions attached to the original TARP allocations? (Well goooooolly, wasn't one of the architects of the TARP was sitting right next him during his admonishment of the banks?) The next question to ask is this: what will this now do to the willingness of financial institutions to take additional TARP funds? Jamie Dimon gave the answer today on CNBC. JP Morgan will not be taking anymore funds from the government.

Another example of this type of behavior stems from the stimulus plan. This is fertile ground, but let's just focus on one populist aspect: Buy American. How can anyone with a minimal understanding of how our economy works insert this provision into a "stimulus" plan is beyond my level of comprehension. Can one say Smoot Hawley fast enough? Did anyone think to look at a company like Caterpillar and ask how much of their sales are derived from overseas?

Here's another example: the Federal Reserve paying interest on deposits above the overnight rate. If Fed Funds are at 0-.25% and the Fed is paying banks 1$ on there reserves, then won't this create a situation where banks can earn risk free money of .75%? In tumultuous times, this is like manna from heaven. MNI reports today that The Federal Reserve Board Thursday announced it is seeking comment on a proposal to create "excess balance accounts" at Federal Reserve Banks designed to ease tensions in relationships between financial institutions that have developed since the Fed began paying interest on reserves. "Because the actual federal funds rate has tended to regularly trade below the rate which the Fed pays on excess reserves, banks have had an incentive to hold more excess reserves, and this has led to "disruptions," according to the Fed proposal."

Lastly, has anyone thought it's a bit peculiar that the yield on the US Treasury 10 yr note has risen 70 basis points to 2.80% and gold has risen to $920 with horrible economic news pouring out from every economy? How could this occur? Is it possible that the markets are getting a little nervous about the size of not only the US proposed stimulus plan at $825 billion, but also the floating of a "Bad Bank" idea that would need to be funded with $1-2 trillion?

These are the many issues that arise when the government gets involved in "fixing" the economy.

Here's my Busch Law of Intervention: for every government policy action to assist the economy, there's a greater negative private sector reaction. Criticize banks for paying bonuses and they won't take TARP funds to stimulate lending. Make companies buy only American goods to get stimulus money and our trade partners will shut them out from their stimulus plans and economic growth will be reduced. Issue trillions in debt to stimulate the economy/fix banks, the bond market will drive up interest rates to remove the stimulus you are trying to achieve.

Here's my last question: will the actions by the US government cut off a recovery just as it's beginning to happen later this year?


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Andrew Busch

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Andrew B. Busch isGlobal FX Strategist atBMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor.He can be reached here .