The mid-term election results appear to match what market participants expected in the days leading up to voting yesterday. We will refrain from political commentary other than to make the observation that there is a difference between “benign gridlock” when the country’s course is essentially sound and gridlock when our fiscal situation is heading for disaster — which to us seems more like a suicide pact than a political strategy. Meanwhile, the Federal Reserve is set to announce the details of its second round of quantitative easing later today. QE2 is essentially a euphemism for printing money, which in our modern economy takes the form of the Federal Reserve buying treasury bonds of intermediate to long term maturities. Read this article for more commentary.
In an interview with The Economist, French Finance Minister Christine Lagarde comments on her country’s attempt to trim the budget deficit to 3 percent of GDP by 2013. Ms. Lagarde states that significant austerity measures will be imposed rather than relying on tax increases. In addition to her comments on the fiscal situation in France, Ms. Lagarde comments on the bank stress test results due to be released on Friday.
Kansas City Federal Reserve President Thomas M. Hoenig has been a voice in the wilderness for some time. Mr. Hoenig was the only dissenter of the policy action at the January meeting of the Federal Open Market Committee because he believes that economic and financial conditions no longer warrant the Federal Reserve’s commitment to keep the federal funds rate at “exceptionally low” levels for an extended period of time. Last year, Mr. Hoenig gave a speech outlining alternatives to the “too big to fail” doctrine that has become conventional wisdom in Washington. Read this article for Mr. Hoenig’s current views and a link to a recent speech.