The Fed and the Bush/Obama teams have been playing the role of juggler - just keep a lot of things moving in the air until they can be recaptured and placed back in their secure storage racks.
The juggler appears to have discovered that a recent earthquake in Massachusetts has thrown all the objects in the air out of kilter. Some of the objects no longer under control include:
- The Bernancke confirmation is in trouble. Key Democrats have expressed possible opposition (see Wall Street Journal article).
- Fannie Mae (FNM) and Freddie Mac (FRE) may go out of business. The two giant government-owned mortgage agencies may be restructured or dissolved, according to Barney Frank (D-Mass.), chairman of the House Financial Services Committee (see Bloomberg article).
- All the recent assumptions about how the health care sector would be affected by legislative reform are now out the window. Higher revenues and profitablilty that appeared to be in the offing for companies in this sector now are not likely to be experienced.
- The financial sector is sensing that the public trough from which it has been swilling may no longer receive slop.
- The possibility that government home purchase tax incentives will not be renewed after April is probably becoming a certainty.
- The QE activities of the Fed will be greatly reduced because of political pressures. Also, the Fed will likely no longer provide the extensive MBS support that has been in place over the past many months. The jawboning of the Fed on reducing QE, which may have had an element of political posturing, is now more likely to become reality.
The good news from all this is that Washington may stop kicking the can down the road the way it has for the past 17 months. The bad news is that the can is now further bent out of shape from the kicking.
The possibility is becoming more likely that the housing activity of 2008 and 2009 may lead to an additional layer of defaults as the housing bubble resumes its deflation.
Government support of the banking sector will be diminished just as we enter a critical 6-12 months in commercial real estate deflation.
The leverage the government used to exact self-restructuring from the financial sector is diminished. The leverage may return if the "recovered" banks discover they are still insolvent without swill supplied from Washington. But that will take a while and only get us back to the situation of the fall of 2008. The unfortunate circumstance is that judgment day may have been delayed by 2-3 years but not avoided.
All this is happening just when the employment picture is suddenly darkening. The Bureau of Labor Statistics reported that the unemployment rate worsened in 43 states during December. This follows yesterday's significant rise in weekly initial unemployment claims, increasing the 4-week moving average for the first time in five months.
Many aftershocks of the Massachusetts earthquake will be experienced over the coming months. Some will be damaging, amplified by underlying economic weakness. This is an opportunity to finally start doing the right things, but the process is controlled by political forces and nothing could be more fickle than political forces.