Every year since 1965, Gallup has asked Americans whether they view big government, big labor, or big business as posing the biggest threat to the country. And each time, big government has been the easy winner by a large margin. Yet it looks more and more as if it's big government to the rescue as the housing market continues to implode and credit markets stay frozen. And I am going to try to keep up with the twists and turns. As my guy Ed Yardeni notes this morning in a note to clients:
The greatest credit bubble of all times has burst. The consequences are getting exacerbated by the greatest margin call in the credit markets of all times. The Fed and other government agencies really don't have much choice but to provide the greatest bailout of all times. Will it work? It hasn't so far. But there are still 300bps left between the federal funds rate and zero.... For the year to have a happy ending, instead of a disastrous one, here are the major developments that would mostly likely have to happen, even though they might not seem most likely right now: The Fed would continue to pump lots of liquidity into the commercial banking system and lower the federal funds rate to 2% at the March 18 meeting of the FOMC, or sooner. If that doesn't stabilize the credit crisis, then a 1% federal funds rate by mid-year should follow.... Lowering the federal funds rate to 2% or less should freeze all mortgage resets. Obviously, home prices would have to stop falling by this summer.