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Farrell: Don't Mess with Mother Superior

When I find myself in times of trouble,

Mother Nancy comes to me.

Speaking words of wisdom, let it be.

And in my hour of darkness,

Nancy's right in front of me,

Speaking words of wisdom, let it be.

Sorry Sir Paul. It just seemed to fit. After wondering aloud last week in this letter what was in the health care bill, I remembered Mother Superior Nancy Pelosi's admonition "Just pass the health care bill, then we'll find out what's in it." Far be it from me, a former altar boy (one of the distinctions I share with my pal Art Cashin) to question Sister Nancy. But then I heard Republican House Minority leader John Boehner (R. Ohio) boom out on radio that the way to fix the economy was to put people back to work. Thank God we got that straight. I wish someone would tell him that saying it loud and in a deep voice doesn't make it happen. So there is equal political bashing. I can't remember who first said it, but you elect what you deserve.

And when the brokenhearted people

Living in the world agree,

There will be an answer,

Fhaggetaboudit.

The jobs number released last Friday was essentially lousy. Very few jobs were created, temporary jobs actually fell, and the unemployment rate was unchanged only because the number of discouraged people looking for work dropped. The good news in the report was the work week lengthened and the average pay went up. If those trends continued, then the demand for new workers would rise. But with the confusion over the cost of health care, the uncertainty around taxes and the new financial regulations yet to be written, the motivation for hiring is low.

With the economy clearly slowing, the call for the Fed to step back into the market and renew its program of quantitative easing is growing. The two-year government note broke below 0.50% last week and the ten-year hit 2.8%. The government bond market is screaming that the economy is in deteriorating shape. If the Fed started to buy long maturity Treasuries, they would pay for them by creating money with their magic checkbook. The idea is the cash going into the system should encourage lending and stimulate the economy. Lenders would be more willing to lend, and, with very low long rates, that would be the result of this program; businesses and consumers would (should?) be willing to invest and spend. But the former program to buy mortgage securities hasn't exactly worked with a trillion or so sitting at the Fed, but the policy options are few.

Some speculate the Fed will start by rolling the maturing mortgage bonds they hold into Treasury paper. This would not increase the total debt, but it would greatly expand the money supply. That would ultimately, if not immediately, stir fears of eventual inflation. The dollar would be trashed. An article in the current issue of Barron's by Jonathan Laing says, "It's a sensible plan. The only way to get folks out of their funk is to convince the market that the Fed will buy whatever is required to fan modest inflation and be prepared to act on it."

The Fed meets this Tuesday. It's too soon for them to move on this plan, if indeed they ever do, but Fed watchers will comb the statement for clues.

I wake up to the sound of music,

Mother Nancy comes to me,

Speaking words of wisdom, Let it be.

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