Shocked into an inconsolable state, Presidential Candidate Hillary Clinton feared out loud yesterday that injecting liquidity into the economy might reduce the United States to the economic level of post 1990s Japan.
We might be drifting into a Japanese-like situation. I don't think we can work our way out of the problems we're in in the broad-based economy with monetary policy alone. I think the Japanese tried that and tried and tried that.
The phenomenon Mrs. Clinton is grasping for is the "Liquidity Trap." With interest rates so low that monetary authorities have no where left to go with rate cuts, and where the economy is stagnate, expectations for long term returns in, e.g., equity investment are low and market participants keep their assets in short-term vehicles or cash. This, of course, makes matters even worse.
Liquidity isn't the answer, you see. Instead, we have to use liquidity.
Details after the jump.
Specifically, Clinton's suggests that the government, or a proxy for the government (the FHA in this case), buy up mortgages where borrowers are underwater on equity. In typical Clinton fashion, the size of such a program wasn't discussed. This was probably a good thing, given that the best estimates put underwater mortgages in the United States at about $2 trillion.
Clinton is right about one thing, the answer to a liquidity trap is generally a "money gift." In Greenspan vocabularly, "Helicopter Money." You have to find non-bank ways to pour money into the economy. Back, "in the day," that is during the Great Depression, the Fed managed it by buying gold at significantly above market rates. Clinton has stolen a Great Depression concept, and cleverly worked to kill two birds with one stones. First, the Helicopter Money. Second, acquiring political capital by directing the gift at a demographic likely to vote for her: Homeowners daft and financially irresponsible enough to take on mortgages that required insanely optimistic assumptions about eternally rising asset prices to make economic sense. Of course, her charity is cast in the light of compassion, "fairness" and justice.
Far be it from us to point out that just because a homeowner is faced with negative equity, nothing is necessarily preventing them from making their payments, or preventing them from being back above water if asset prices recover. We would never point out that these particular "victims" don't seem like decent candidates for government assistance. They probably are in exactly the demographic that Clinton hopes to win away from other candidates for high office, however.
As for "turning Japanese," the Wall Street Journal might give us a clue there:
Clinton: March 12, March 14, March 20
Hmmm. Could be.
We don't have the heart to tell her what the song is actually about, however.
-- Equity Q. Private is the Author of
and a Guest Editor for DealBreaker.com