Cleveland, Clinton, and Capitalism, That's a Twisted Trifecta

The courts are now being called in to help arbitrate the ramifications of the subprime crisis. Cleveland, one of the worst cities, or was it the worst, is now suing 21 different lenders that "knowingly created a public nuisance by exploiting the city of Cleveland." The city is seeking hundreds of millions of dollars "at least" to help cover the cost of demolishing thousands of abandoned homes. The plummeting population of Cleveland is putting the city in a budgetary squeeze to maintain services. Baltimore, on Thursday, beat them to the punch, though, and filed suit against Wells Fargo Bank NA, subsidiary of Wells Fargo & Co. Of these two suits, it's easier to see the Baltimore suit going farther because of its limited scope, but I'm not a lawyer. The Cleveland suit seems more like a shot in the dark, but may get much more interesting if the suburbs become involved in a class action type action.

Washington is all abuzz with talk of an economic stimulus package to help offset the downside pressures in the market. Bipartisanship is a word that's hardly mentioned without a curse, but congressional leaders are falling over themselves trying to say it the most. As well they should, because any deal will have to accord with the wishes of our King, I mean, President. Treasury Secretary Paulson says that Bush has yet to decide, but stresses that any stimulus package should be temporary at best. It should make Bush's State of the Union Address more interesting.

The Democrats, for their part, are now faced with breaking their "pay as you go" promise, and could potentially borrow billions more to help finance their version of an economic stimulus package. In a bipartisan fashion, everyone agrees that the measure should be permanent and it needs to be felt by the general population very quickly. With the coming Presidential election, the stakes are much higher, and Hillary Clinton is trying to be one of the first in the field to offer a plan to offset the downside risks. Ben Bernanke is going to pow wow with the Democrats at a policy retreat later this month, to consult with them as they try to find a way out of this fiscal nightmare. The Fed Chairman's words are being parsed for hints at the January board meeting and what moves the Fed will take. Most economists are betting on a rate decrease of at least half a percentage point, down to 3.75%. Ben will meet with Nancy Pelosi on Monday for what will amount to little more than a photo opportunity and a chance for the Speaker of the House to appear as though she's doing something in the midst of growing signs that the economy might be in real trouble.

Among these signs are the rising price of gold, which is expected to hit $900 per troy ounce, as investors seek reliable shelters in the face of market uncertainty. Another sign of troubled times in the economy are the anemic holiday sales at all of the major retailers, with the notable exception of Wal-Mart. Considering Tiffany's was also subject to the slow down, the upper echelons of earners no longer appear immune to these downward risk pressures. Another interesting note is that the Treasury Department's last issuance of inflation protected securities fell to 1.65%, down from October's rate of 2.36%.

The difference in response between the Federal Reserve and the European Central Bank couldn't be more stark. Whether the glass is half full of half empty, it would appear that the philosophical difference lies in whom the stimulus package and the results are directed at. The Federal Reserve, in lowering rates, makes it more appealing for businesses to earn money and to help money move through the economy, hopefully in the form of capital investment. The European Central Bank, on the other hand, appears to be betting that keeping rates up will encourage people to save money in depository institutions, which will then be on a much sounder footing to issue new loans and securities. The question remains to be seen whether investors will respond to this strategy, but so far it would appear not.

Among the companies named in the city of Cleveland's law suit are some of the most troubled financial institutions in the U.S. Countrywide Financial, the biggest mortgage dealer which helped spur the growth in subprime mortgages is being purchased by the Bank of America. Citigroup is turning towards Kuwait and China to seek billions more in capital infusions to stay afloat. Merrill Lynch is looking at a much larger loss in the fourth fiscal quarter in attempting to move stock options issued to its employees off of its balance sheet.

All of this talk of moving the economy out of recession through a temporary spending measure, as Ron Paul said in the debate on Thursday night, would be productive in that it would inject capital into the economy in a way that the Fed cannot, but would be counter productive in that the United States government has no money to pay for anything that it would want to.