Jon Taplin's Blog

Paulson,The Bear & Helicopter Ben

 When is the last time in memory a U.S. Treasury Secretary talked like this?

After years of unsustainable price appreciation and lax lending practices, a housing correction was inevitable and necessary. That correction is underway. Over the next two years, we also face an unprecedented wave of 1.8 million subprime mortgage resets, raising the potential of a market failure. Because the industry does not have the capacity to manage this volume, without action, unnecessary foreclosures would result.

Hank Paulson made the bear case on Monday that we are in for a world of hurt. Now his colleagues on Wall Street are making a full court press on Fed Chairman Bernanke to aggressively cut interest rates and this morning he gave them the reassurance they were asking for. It’s one thing to question “Helicopter Ben’s” manliness with headlines about whether he’s “tough enough”, but it’s another to ask if easy money medicine is the cure for our particular problem. As the Times article points out, bankers nearing a depressing bonus season are not exactly objective stewards of our monetary policy:

Wall Street traders and investment bankers are counting on drastic rate cuts to help make stock prices rise, says Albert M. Wojnilower, a consultant to Craig Drill Capital, a hedge fund. Rising stock prices, in turn, help lift year-end bonuses, which were relatively small this past year.

“It is easier for people on Wall Street,” Mr. Wojnilower said, “to cloak their personal desires in a national concern.”

As I have pointed out before, the potential “Stagflation” we are encountering is not easily cured by lowering U.S. interest rates. As interest rates fall, so does the dollar which makes both oil and other imported goods more expensive, thereby fueling inflation. The idea that the cure for our problems is to get the overstretched consumer to go deeper in debt in order to keep mall traffic up seems fairly suicidal.