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June 29, 1990
Mortgage discounts drifted lower this week, aided by powerful (if camouflaged) Fed easing. Formal confirmation may take weeks, but the Fed has relaxed its grip on bank reserves maybe just in time to prevent a recession.
Most bond traders are already installed on Hampton beaches, and money markets will be quiet until the next big data release on Friday, July 6. The employment statistics due out that day can be weak, and the potential is enough to justify floating loans until then. There are two politicoeconomic thrillers underway that would make good beach reading, if they were fiction. The thrills are enhanced by the several million jobs hanging on the outcomes.
The first one is an old standby, Hitchcock in black and white, the federal budget deficit. It looks as though Bush and Congress are going to cut a genuine deal, and a big one: cut spending and increase taxes by a $50 billion total next year alone.
The markets react happily whenever the players get close to a deal, but herewith a minority report and concern.
No American government since WWII has attempted an antiKeynesian move so big. This cut may wreck an economy that is already weak, and it may not be possible for the Fed to offset the damage fast enough with lower rates.
The second plot is a Mad Max job involving accountants racing back and forth between Texas and Washington. The race is to determine how big the S&L bailout will be, and the thrill part is the impact on the economy from the bailout payoff.
Nobody knows whether the bailout belongs on the Federal budget or not, whether it is "spending" or not, whether it will help or hurt the economy, speed inflation or slow it.
You see, nobody is really being "bailed out." No depositors have lost a dime, no consumer spending was lost. The bailout will not create any new money. The Treasury will borrow some hideous sum, make a tick mark on the FDIC ledger, and all the borrowed money will disappear. Poof.
All that will be left is the obligation to pay interest and pay the money back (or roll it over forever, more likely). The guess here holds that the bailout is going to hurt more than inflate. It may hurt a great deal if the borrowing costs hit at the same time the Congress gets budget religion.
These two experiments in economic excitement remind of the Reagan supply side attempt. As was said at that time, couldn't we try this out on a smaller country, first?
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