FedWatch For 11 December: Brian Wesbury's Views

As my partner and I discussed the potential effects of Tuesday's Fed rate decision on our impending options portfolio purchase, we turned to a discussion of Brian Wesbury's excellent editorial in Friday's Wall Street Journal, entitled, "Let's Not Panic and Ruin the World."

Demonstrating, once again, why he ranks at the top of my personally favored and trusted economists, Wesbury notes evidence of the US economy's continuing strength, and the lack of need for another Fed rate cut.

Among those signs are: real GDP growth, consumer price rises of 3.5% in the past year, positive recent consumer spending data, and the beginning of the credit market's self-healing, with purchases of or into distressed situations, such as Citigroup and E*Trade, by Abu Dhabi, Citadel, and CIFG's parent.

The primary ailment of the US financial markets at present is counterparty risk. That is, parties are worried about the soundness, or solvency, of counterparties which may hold assets, the value of which is overstated. These would include any assets involving subprime mortgages, e.g., CDOs.

It is not apparent that banks and other institutions are short of lendable funds. If that were true, rates would be higher. Rather, despite lower rates, certain problem areas are not receiving new loans. Such as the riskiest sorts of mortgages.

And, with Federal activity in the sector, and calls by various Presidential candidates for even more punitive actions, the long term market for investors who would buy mortgage-backed CDOs has to be evaporating.

As Wesbury points out, trying to "save the world" now will only put it at greater risk. What is really a problem for only a small part of on economic sector, subprime mortgage lending, is causing actions, including Fed over-easing, that may well damage the overall economy in the longer term.

Nobody wants to see the US fall victim to the type of liquidity trap which ailed Japan for almost a decade.

Hopefully, the Fed will hold the line on rates Tuesday, and surprise the market. By withholding the latest dose of economic narcotic from the markets, equity prices may temporarily decline. And fixed income rates will likely rise, decreasing prices of those assets, too, for a while. But to ease with another rate cut is to risk the beginning of yet another asset price bubble of the sort that the US markets saw peak in 1999 and 2007.

US employment, as we know from last week's jobs numbers, continues to grow. Personal earnings continue to grow, as does personal spending. The fundamental drivers of the economy, jobs and incomes, are solid and growing.

The US does not have an economy poised for recession. Rather, it has an overabundance of mediocre economists mistaking a single-sector credit problem for economy-wide weakness.

Fortunately, Mr. Wesbury continues to point us in the direction of sound data, correct interpretation, and preferred actions.

Or, as we hope this week, Fed inactions.