Speaking of Bernanke, he's not really doing a bang up job, is he? His testimony yesterday confused everyone and panicked the markets. Granted, not much is needed to panic the markets right now, but part of Bernanke's job is to see to the long term health of the economy - and he's failing. While it's certain that he's been caught between a rock and a hard place recently - he eases too much on the rates we could be hit with runaway inflation, he keeps things too tight we face recession - but yesterday's testimony was a self-inflicted wound. Besides endorsing the ridiculous tax rebates, which Wall Street knows will do nothing to stimulate the economy, he seemed to hedge on how much the Fed will ease at the next meeting. The markets were looking for confirmation that he'd ease by at least 50 basis points. They didn't get it and sold off.
Here's the thing. If you signal that you're going to slowly drop interest rates over time, nothing will happen. Any sane investor, knowing that rates will be lower a month from now, and all else being equal, will wait. So, if you're going to cut rates in order to get the markets moving, you should do it all at once rather than by dribs and drabs. I think Bernanke should drop the Fed Funds rate all the way down to 2% and do it today. It would be a shock to the markets from both a timing and a size perspective. I'd accompany the cut with a statement suggesting that no more help was forthcoming from the Fed in terms of interests rates. The markets would then be aware of the playing field and could adjust accordingly.
That's the monetary side. Fiscally, Bush should trash the rebate nonsense, let the Democrats know that he'll veto any new spending measures, demand the 2003 tax cuts become permanent, and propose significant cuts in both corporate and capital gains taxes.
If Bernanke acted today and Bush on Monday, the markets would rejoice. We might need some pullback on rates down the road if inflation starts to rear its ugly head, but we'd be past the recession scare by then. Anyhow, that's my plan, if I were king for a day.
Of course it won't happen. We're going to get rebates, which historically have little or no stimulus effect. And we'll get spending from the Democrats, their answer to everything. We'll pay for them both down the road. If that's the price we have to pay for some real fiscal stimulus, I suppose I'm okay with it. But I'm not sure we'll get real stimulus - the Republicans are playing defense here, as usual, and when was the last time they didn't capitulate?
One last point. Bernanke came out against making the Bush tax cuts permanent, at least as part of this stimulus plan. He acted, as Jimmy Pethokoukis said on Larry Kudlow's show last night, as if tax cuts were some necessary evil, things we should only do as a last resort. Bernanke didn't exactly say that outright but you got the feeling. He did say outright that making the tax cuts permanent would not have an immediate stimulating effect on the economy. I disagree. So do the majority of people on Wall Street, who also believe additional tax cuts - again, on capital gains and corporate taxes - are in order and would likely have an immediate effect. But his comments yesterday made everyone pause and take note of the man. The markets are now rightly suspect about his supply-side, free-market bona fides, and have clearly lost confidence in him. He's a good man and might be a fine Fed chairman under other circumstances, but every step of the way over the past volatile six months, he's come up short. I think he's going to be a one-termer. And at this point, I hope so.
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