The Punch Bowl CaucusThe motley collection of gazillionaires

moneybox: Commentary about business and finance.
The Punch Bowl CaucusThe motley collection of gazillionaires, conservatives, and industrialists begging the Fed to cut interest rates.

By Daniel Gross
Posted Monday, Aug. 27, 2007, at 6:07 PM ET

[url=]Federal Reserve Board Chairman Ben Bernanke
[/url]In
the past week, a strange group has been pleading for the Federal
Reserve to return the punch bowl to the toga party—to slash interest
rates to restart the Wall Street party. The Punch Bowl Caucus, whose
members hail from all over and hold different ideological views, share
a common belief: that the Federal Reserve, by reducing either or both
of the interest rates it controls, can turn the clock back to the
halcyon days of 2005 and 2006, when home values moved in only one
direction, when defaults were nonexistent, and when credit to
homebuyers, consumers, and, above all, to hedge fund operators, ran
downhill like a mighty stream.CNBC commentator James Cramer founded the caucus with his now-famous capitalist manifesto
on Aug. 3. (He serves as honorary chairman of the Wall Street chapter.)
Cramer urged the Fed to act on behalf of the greatest among us—"My
people [that is, hedge fund operators, private equiteers, and assorted
tycoons] have been in this game for 25 years. And they are losing their
jobs and these firms are going to go out of business"—as well as the
least among us. "Fourteen million people took a mortgage in the last
three years. Seven million of them took teaser rates or took piggyback
rates. They will lose their homes."While Cramer's tirade was
lighting up YouTube, desperate manufacturers banded together to form a
Midwestern chapter. Ford CEO Alan Mulally and Chrysler CEO Robert
Nardelli may be new to Detroit, but they've quickly adopted the local
custom of looking to Washington when sales begin to slump. A week after
signing on to Chrysler, Nardelli, the former CEO of Home Depot,
realized he had jumped from one position where he got nailed by the
declining housing market to another where he's likely to get nailed by
the declining housing market. (Falling housing prices and
less-forgiving credit markets are making more Americans think twice
about tapping home equity to finance $30,000 car purchases.) So on Aug.
16, Nardelli suggested it would be a good idea if the Fed were to cut rates. The following week, Ford CEO Mulally obliquely echoed (subscription required) Nardelli's call.
Meanwhile,
supply-siders were organizing their own punch bowl chapter, which has a
unique bylaw: The government should never intervene in the economy,
unless it is to bail out hedge funds and investment banks. Trusting the
suddenly volatile, forward-looking markets more than backward-looking
government data, supply-siders have concluded that inflation is under
control, and hence that it is safe for banks to start giving money away
again. Wayne Angell, a former governor of the Federal Reserve, convened
this chapter in its clubhouse—the Wall Street Journal op-ed page—with a call
(subscription required) for the Fed to cut the Federal funds target
rate by 75 basis points. Angell's motion was heartily seconded by
CNBC's Larry Kudlow, writing in the National Review group blog the Corner.The
caucus has had its biggest recruiting successes in the housing sector.
In announcing the formation of this chapter, Angelo Mozilo, CEO of
Countrywide Financial, the nation's largest mortgage lender, succumbed
to the common sin of extrapolating to the general from one's particular
circumstances. In his interview
with CNBC's Maria Bartiromo, Mozilo said that the punk housing market
would undoubtedly lead the nation into recession—an event that should
inspire cuts in the Fed funds rate. But it's not just
struggling rich guys who are begging for cuts. Late last week, Martin
Wolf, chief economics commentator of the Financial Times, formed an international auxiliary. Wolf appealed
(subscription required) to Americans' vanity and missionary zeal. He
pleaded with Bernanke to forget about the sufferings of gazillionaires
like Angelo Mozilo, and think about poor Chinese peasants. In today's
global economy, he argued, Americans excel at borrowing and spending
while the rest of the world excels at saving. For years, "the U.S. has
been the world's spender and borrower of last resort." Americans must
spend to keep the world's factories humming. And to do so, they need
cheap credit. The Punch Bowl Caucus has already proved to be an effective lobbyist. The Federal Open Market Committee meets next on Sept. 18, and the futures markets
indicate that investors believe a rate cut is highly likely: a 49
percent chance of a 25-basis-point reduction and a 51 percent chance of
a 50-basis-point reduction, based on Friday's closing prices, according
to Citigroup. But while the caucus looks like it will chalk up an early
tactical victory, I wonder whether it has a winning strategy. The Punch
Bowl Caucus holds as an organizing principle that the Federal Reserve
can provide a real and psychological boost to markets—and hence
minimize or obviate entirely the fallout of natural economic
occurrences such as asset bubbles and the business cycle. College
students don't alleviate the after-effects of an evening spent at the
punch bowl by returning to lap up the dregs. Just so, finance types
should know that cheap money, credit on demand, and endless leverage
aren't the cure for a hangover caused by too much cheap money,
leverage, and credit on demand.