Austan Goolsbee, the chair of the Council of Economic Advisers, announced that he is heading back to the University of Chicago to spend more time with his students. Professor Goolsbee believes that the Midway is a much safer place to be than the chaotic environs of Washington, D.C. It is better to be beloved for challenging the minds of the next generation of leaders than to lead the challenge against the economic buffoons that are generating nothing but red ink and angst. More importantly, this is the second head of the Council of Economic Advisors–and the third from Obama’s economic team (Larry Summers)–that has headed for either the lecture circuit or the safety of the classroom.
The Obama administration has not had many economic successes and the revolving door on the economic policy committee room resound well with a populace fearful about the fragile state of the economy. It is interesting that Secretary Geithner is the only holdover from the initial economic appointments and in my opinion he should have been the first to depart. The president’s economic policy has been inconsistent and really directionless. As I have discussed in NOTES for the last eighteen months, Geithner should have been more aggressive on dealing with the mortgage problem and help to alleviate the continued stress in the housing market. The large banks should have been forced to write down residential mortgages while providing some relief to insolvent homeowners for the system was going to have to absorb the hit one way or another.
Geithner wanted to maintain the capital of the large banks and was willing to prolong the moribund balance sheets and hope that time would solve the problem of negative home valuations. Time has not helped Geithner and now the “exploding ARMs” are lifting mortgage rates and forcing more people into foreclosure. It seems a national program of forbearance would have been a better program. Now Obama will name a new CEA Chairman and let us hope that he finally moves outside of his “small circle of friends” and chooses someone with some economic ideas outside the status quo. Please, don’t choose a Wall Street economist.
The S&Ps followed through with renewed weakness as the weekend was filled with news stories about the economy slowing down. Some FED speakers–Plosser and Rosengren–were cautioning that it is too early to determine that the U.S. economy is heading into a second downturn and still look for growth to pick up in the third quarter. It is not growth of 3% that is important but rather where unemployment will be heading into 2012. If the rate of unemployed persists above 9%, the Obama administration will apply pressure to Congress to stimulate, which will throw the budget into disarray. If Congress balks, all the stimulative measures will fall on the shoulders of the FED.
To reiterate, Mr.Bernanke is most afraid of a deflation setting in, especially if the real estate market continues its declines and bank and consumer balance sheets come under renewed stress. Inflation is off the table until the job picture vastly improves. As KOJAK would say, “YOU CAN TAKE THAT TO THE BANK.” It is the fear of deflation that keeps the FED chairman awake at night and after two rounds of QE failing to noticeably improve the economy, the fear amongst the economic gurus is increasing. Muddling through is a poor policy plan especially with so much political turmoil in Europe and the Middle East. All of the economic and political uncertainty will mean that the FED‘s discussion about QE exit plans will be mere verbal masturbation and what makes one long for the hallowed halls of academia.