In a surprise move today, the Bernanke Fed launched another shock-and-awe stimulus plan that will expand the Fed’s balance sheet another $1.2 trillion through the purchase of $300 billion in long-dated Treasuries, $750 billion in mortgage-backed securities (Fan/Fred), and another $100 billion in U.S. agency debt. The Fed also is launching its Term Asset-Backed Securities Loan Facility (TALF), which could go as high as $1 trillion when it’s all said and done.
The money quote in the FOMC statement: “To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further . . . .” The decision was unanimous -- no dissents.
In response, Treasury rates plunged at the long end (as prices were bid up in expectation of Fed buying) and yields fell 50 basis points. Gold surged $45. The greenback plummeted. And stocks moved up 91 points, continuing the rally of the past week.
Of course, the Fed wants to get mortgage rates down toward 4 percent, and some on Wall Street will cheer this. However, it all has a 1970s feel to it.
The Obama budget raises tax rates on investors and businesses, and supports a cap-and-trade tax, universal health care, and various regulations for unionization. Meanwhile, a spate of trade protectionism is breaking out with Mexico and China. All of these are anti-growth policies. And now the Fed is ramping up its monetary pump-priming. So the obvious risk is too much money chasing too few goods producing a stagflationary recovery.
The dollar is out the window. Monetizing debt is back in style.
I go back to Art Laffer’s four prosperity killers: inflation, higher tax rates, re-regulation, and trade protectionism. You can put a check mark next to each box.
While the country is bashing AIG for its ridiculous bonus payments to the traders who blew up the global credit system -- and AIG deserves to be bashed -- the bigger reality is that economic policies appear to be moving in the wrong direction.
We will get an economic recovery. And there’s a pretty good short-term stock market rally in the cards. But you just have to wonder where all this is leading. Supply-side economics is out, along with hard money.
At a dinner two months ago with Nobelist Robert Mundell, one of the authors of Reaganomics along with Laffer, Mundell told me that we should stabilize the dollar, slash the corporate tax rate, and declare a two-year capital-gains tax holiday. Instead, top marginal tax rates are going up and the dollar’s going down. It can’t be a good thing.
Who's Saying What About Bernanke: