'Save Us!' Says Merrill Lynch

The firm's top economist says Uncle Sam should buy Wall Street's bad mortgage debt.

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Wall Street has been supporting Democrats in greater numbers since the Clinton era. How to reconcile that with its professed belief in the wonder-working power of free markets? Maybe there is really nothing to reconcile when you have the top economist at one of the country's premier investment firms making recommendations like the one made by David Rosenberg of Merrill Lynch (boldface mine):

To alleviate credit market paralysis, the outright purchase of illiquid mortgage-backed securities (MBS) is probably required, and could employ government-backed fiscal action. So far, government-backed plans have relied on just voluntary actions by loan-servicers to modify existing mortgage loans, resulting in low participation. The Federal Reserve itself could buy some of these securities, but the Fed alone cannot unclog the congestion in the credit markets, in our opinion.

The US Treasury, under the auspices of the White House, has rejected plans calling for government intervention. However, a combination of the quick demise of Bear Stearns and the domino effect this could have had on our financial system, plus home prices still in free fall, has increased calls for government involvement. Eventually the Bush Administration may have to change its attitude.

However, more aggressive monetary or fiscal policy responses will not end the economic recession, stop home prices from falling, or reverse the dramatic de-leveraging in the financial system. Bolder Washington initiatives can, at best, only soften the negative impact on the economy and possibly provide for somewhat of an orderly unwind of credit conditions.

My take: The more Uncle Sammy helps Wall Street, the more pressure to help Main Street. Hillary got the meme right in her speech of a few days ago (boldface mine):

Last week when it became clear Wall Street was on the brink of a financial meltdown, the Fed and the administration sprang into action. The Fed extended a $30 billion lifeline to prevent Bear Stearns from imploding and took unprecedented action to provide tens of billions of dollars in credit for other struggling investment banks as well. Homeowners, on the other hand, have received next to no assistance. Well, let's be clear. When families are losing their homes, that's also a financial crisis. When people's greatest source of wealth is losing its worth, as college costs and healthcare costs and food and gas prices shoot up, that's a financial crisis too. When "for sale" signs line streets across our country, when cities and towns are struggling with the costs of foreclosed properties, that is also a financial crisis.

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Merrill Lynch
Federal Reserve

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