Perhaps my comment might have seemed out of left field: "Has anyone discussed the possibility that the Fed might intervene in 5 or 10 year treasuries to reduce intermediate rates and prolong the bubble?"
Let me explain my thinking. Right now, most of the street economists are projecting 4% GDP growth this year. They seem to think that we are in the beginning stages of a typical business cycle recovery. Of course this cycle is anything but typical, especially considering that two of the main engines of a typical recovery, real estate and consumer spending, have no pent-up demand. If anything, both are looking a little peaky.
So maybe we will have punky GDP growth, like 2%. But what if the economy weakens even further? We might start seeing R-Word and small “d” word (deflation) articles in the business sections of our local periodicals. And, of course, the fiscal policies of the current administration offer no help. So what can Easy Al do? And this brings me to my earlier question.
If the Fed intervenes in the 10 year, by bidding up the price and lowering the yield to around 3% (not impossible), this will have two major benefits (from the Fed’s perspective): 1) this will increase liquidity, and 2) this will spark a whole new round of real estate refinancing. “Party on, Wayne!” “Party on, Garth!”
Of course: the longer the party, the worse the hangover! But in the mean time, the economy picks up a little steam and Bush gets a second term. Then the Big “D” word (Depression) articles start hitting the front pages of our local papers.
This is unlikely and it is always easy to imagine a bearish scenario, but if the economy weakens in the next few months, how else can Greenspan react?
Best to all. |
