The Hand Is Quicker Than the Eye: Mortgage Bailout Begins
We now stand officially advised that the first installment of the mortgage bailout is underway। There will be many, many more installments in coming months, producing the largest cumulative government rescue operation in history. As we suggested in a longer analysis several weeks ago ("The Sub-Prime Crisis: Made in Washington"), such a bailout is both essential and inevitable. We expect that each step along the bailout road will be marked by vigorous Administration and FED assertions that this IS NOT A BAILOUT. But hey, that's politics. The ideology of the untrammelled free market, to which both the Administration and Dr. Bernanke subscribe, requires disavowal in proportion to the degree of capitulation.
Stalin once said that when ideology is in conflict with the facts, "change the facts।" In truth, the late tyrant did nothing of the sort. He effectively discarded ideology while intensifying his murderous stranglehold on his people. Politicians are not ideologues: they follow the commands of practicality and political advantage, unless personal psychosis causes them to commit acts of madness (Nero, Caligula, Hitler).
Consequently, contrary to the bravado in both the President's statement and in repetitive FED assertions, the government WILL RESCUE the most important speculators। This category, after all, includes many of the most important BANKS in the U.S. and Europe. Their well-being is indispensable to the functioning of the economy. The vast debt overhang of consumer America precludes any but the shortest, most minimal interruption of the flow of credit to the consumer underpinning of the American economy.
It may be that some of the anti-inflation ideologues at the FED do not see this, do not accept this, do not like this। Nonetheless, like the Spanish Inquisition, they will ultimately bow to the king's will. The "independence" of the FED is greatly exaggerated. In view of the central bank's catastrophic performance in the 1930s and the 1970s, their "independence" is conditional upon behavior which is at least minimally satisfactory to the political powers that be of BOTH PARTIES. We have already seen prominent congressional Democrats publicly threaten to take away some of the FED's regulatory powers if the FED continues to be DELINQUENT in their proper exercise re. mortgage lending. We note that Chairman Bernanke immediately and publicly fell into line.
And so it will be with interest rates. Ready or not, THE FLOOD OF MONEY IS COMING.
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