The Punch Bowl CaucusThe motley collection of gazillionaires, conservatives, and industrialists begging the Fed to cut interest rates.
Posted Monday, Aug. 27, 2007, at 6:07 PM ET
In the past week, a strange group has been pleading for the Federal Reserve to return the punch bowl to the toga party—to slash interest rates to restart the Wall Street party. The Punch Bowl Caucus, whose members hail from all over and hold different ideological views, share a common belief: that the Federal Reserve, by reducing either or both of the interest rates it controls, can turn the clock back to the halcyon days of 2005 and 2006, when home values moved in only one direction, when defaults were nonexistent, and when credit to homebuyers, consumers, and, above all, to hedge fund operators, ran downhill like a mighty stream.
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StumbleUponCNBC commentator James Cramer founded the caucus with his now-famous capitalist manifesto on Aug. 3. (He serves as honorary chairman of the Wall Street chapter.) Cramer urged the Fed to act on behalf of the greatest among us—"My people [that is, hedge fund operators, private equiteers, and assorted tycoons] have been in this game for 25 years. And they are losing their jobs and these firms are going to go out of business"—as well as the least among us. "Fourteen million people took a mortgage in the last three years. Seven million of them took teaser rates or took piggyback rates. They will lose their homes."
While Cramer's tirade was lighting up YouTube, desperate manufacturers banded together to form a Midwestern chapter. Ford CEO Alan Mulally and Chrysler CEO Robert Nardelli may be new to Detroit, but they've quickly adopted the local custom of looking to Washington when sales begin to slump. A week after signing on to Chrysler, Nardelli, the former CEO of Home Depot, realized he had jumped from one position where he got nailed by the declining housing market to another where he's likely to get nailed by the declining housing market. (Falling housing prices and less-forgiving credit markets are making more Americans think twice about tapping home equity to finance $30,000 car purchases.) So on Aug. 16, Nardelli suggested it would be a good idea if the Fed were to cut rates. The following week, Ford CEO Mulally obliquely echoed (subscription required) Nardelli's call.
Meanwhile, supply-siders were organizing their own punch bowl chapter, which has a unique bylaw: The government should never intervene in the economy, unless it is to bail out hedge funds and investment banks. Trusting the suddenly volatile, forward-looking markets more than backward-looking government data, supply-siders have concluded that inflation is under control, and hence that it is safe for banks to start giving money away again. Wayne Angell, a former governor of the Federal Reserve, convened this chapter in its clubhouse—the Wall Street Journal op-ed page—with a call (subscription required) for the Fed to cut the Federal funds target rate by 75 basis points. Angell's motion was heartily seconded by CNBC's Larry Kudlow, writing in the National Review group blog the Corner.
The caucus has had its biggest recruiting successes in the housing sector. In announcing the formation of this chapter, Angelo Mozilo, CEO of Countrywide Financial, the nation's largest mortgage lender, succumbed to the common sin of extrapolating to the general from one's particular circumstances. In his interview with CNBC's Maria Bartiromo, Mozilo said that the punk housing market would undoubtedly lead the nation into recession—an event that should inspire cuts in the Fed funds rate.
But it's not just struggling rich guys who are begging for cuts. Late last week, Martin Wolf, chief economics commentator of the Financial Times, formed an international auxiliary. Wolf appealed (subscription required) to Americans' vanity and missionary zeal. He pleaded with Bernanke to forget about the sufferings of gazillionaires like Angelo Mozilo, and think about poor Chinese peasants. In today's global economy, he argued, Americans excel at borrowing and spending while the rest of the world excels at saving. For years, "the U.S. has been the world's spender and borrower of last resort." Americans must spend to keep the world's factories humming. And to do so, they need cheap credit.
The Punch Bowl Caucus has already proved to be an effective lobbyist. The Federal Open Market Committee meets next on Sept. 18, and the futures markets indicate that investors believe a rate cut is highly likely: a 49 percent chance of a 25-basis-point reduction and a 51 percent chance of a 50-basis-point reduction, based on Friday's closing prices, according to Citigroup. But while the caucus looks like it will chalk up an early tactical victory, I wonder whether it has a winning strategy. The Punch Bowl Caucus holds as an organizing principle that the Federal Reserve can provide a real and psychological boost to markets—and hence minimize or obviate entirely the fallout of natural economic occurrences such as asset bubbles and the business cycle. College students don't alleviate the after-effects of an evening spent at the punch bowl by returning to lap up the dregs. Just so, finance types should know that cheap money, credit on demand, and endless leverage aren't the cure for a hangover caused by too much cheap money, leverage, and credit on demand.
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Remarks from the Fray:
There are 2 sides to every market - and the Fed is not there to just bail out the rich guys when they've made a mistake. Inflation is high and climbing (no thanks at all to the real estate bubble), and the only sensible thing for the Fed to do is to RAISE rates, not lower them to appease Cramer and his goons who made trading mistakes.
Lowering rates HURTS people who are heavy savers and rewards those who are heavy borrowers. What happened to the old teachings that saving is good, borrowing is to be avoided?
Cramer does not have the long term interests of the country and its people in his interest, he only has his own short term greed in mind, and doesn't care if they turn our economy into a Weimar republic.
Anyone who thinks that eradicating the value of the dollar is good for economy, doesn't understand macroeconomics in the least.
--C Miller
(To reply, click here.)
This country needs inflation. If you're in debt, inflation is your friend. This country is the world's largest debtor nation, and nothing but inflation will make this mountain of debt go away. Lower interest rates, debase the dollar and let the foreign holders of US debt securities eat crap. The only alternative is a deflationary death spiral.
--Peterv
(To reply, click here.)
The bailout is not to extend the party. It is to delay the collapse. Very few people are willing to admit how close we were to a compete meltdown a couple weeks ago. The Fed intervention was very deliberate and precise to stop an immediate unwinding via creating breathing room.
The bailout has already begun. The taxpayers are already buying crap loans from shaky companies as a reward for their nonexistent risk underwriting. The discount window game probably saved Countrywide, at least for now. Money Market Mutual Funds were next in the crapper when the CP market seized up.
I find this bold faced hypocrisy tremendously insulting. After suffering decades of free market bullshit from these assholes, they are running to Uncle Sugar hat in hand. How soon until they start calling for us to privatize social security again?
--Sarvis
(To reply, click here.)
It's hard to argue that we should shed too many tears over the various factions that are arguing for rate cuts so that they don't get hurt too badly. The extent to which, in particular, the home building and mortgage businesses bet on the proposition that what goes up won't come down makes you yearn for market justice in its usual form.
The problem, though, is that that particular form of justice will whack potentially millions of people who did nothing particular wrong and who, in fact, were being told that what they did was wonderful. I mean, of course, all of the sub-prime borrowers and others who are going to have to pay the suddenly much higher adjustable rate mortgages if interest rates stay where they are.
The truth is that many of these people are in trouble even if the Fed drops interest rates by 100 basis points between now and the end of the year. Still, a rate cut will save a lot of them and make the difference between struggling to get by and okay for a lot more (and we're talking potentially about millions of people, not a couple thousand hedge fund gurus). That's worth considering.
--randy-khan
(To reply, click here.)
I'd like to recommend that we stop talking about free markets, and stop accusing people of hypocrisy for not staying true to their "free market" principles. I'll concede that there are plenty of nuts who believe in the power of "free market" with religious zeal, but most people understand that it's just an idea. Few people, and honestly few members of the punch bowl caucus, believe that the goal of our financial and monetary policies should be to aspire to the "free-est possible market." In fact, we only have serious financial policy and serious monetary policy because there's been a broad-based consensus, since at least the great depression but probably going back earlier, that the results "free markets" produce are not always desirable. When executives and financiers call for action from the federal government or the federal reserve, they're not breaking form. Those with economic interests will try to lobby the government to further those interests. Sometimes that means asking the government for less welfare and lower taxes. Sometimes it means asking for rate cuts or subsidies. This ain't a revolutionary view.
--cliffmason
(To reply, click here.)
(8/31)