What’s bad winds up good on Wall Street

Bad economic news, like Friday’s jobs report for August, has Wall Street’s Greek chorus chirping for more action from the Fed.

Analysts were out in force after the announcement that no net jobs were created last month. Before the opening bell, Goldman Sach’s chief US economist, Jan Hatzius, said, “Following today’s worse-than-expected jobs report, we now look for the FOMC [Federal Open Market Committee] to announce a lengthening of the average maturity of the Fed’s balance sheet at the Sept. 20-21 meeting, with sales of relatively short-dated Treasuries and purchases of relatively long-dated Treasuries.”

And so the countdown is on. On Sept. 20 the Federal Reserve will meet for an expanded two-day FOMC meeting to chat about the economy.

At the last FOMC meeting, when the Fed locked in short rates for two years till 2013, there were three dissenting votes. While there is no doubt that this group of Fed presidents is decidedly political, with many clearly jockeying to be the next chairman, the overtness was genuinely an embarrassment to the Fed.

The Fed is supposed to be a nonpolitical, purely economic institution. But with a DC address and individual ambitions, some just can’t seem to rise above the temptations.

The Fed was clearly dealt a very bad hand by the Obama administration and Congress on both sides of the aisle. To a large degree, excessive capital-constricting policies and regulations have rendered the Fed’s primary tools, interest rates, somewhat ineffective. yet to be determined or are detrimental to capital expansion (lending) What good are low rates if the people who need them can’t get them?

Clearly, no good at all. Because of this new structural impediment, we have been introduced to Quantitative Easing, whose primary success has been to make the stock market dance.

It’s the “wealth effect,” as Alan Greenspan used to refer to it. The problem is the reason for it: The root cause of the markets getting absolutely bludgeoned in August was that the economy is very weak here in the US and now, contagiously, in Europe.

So while they are weak, the markets have been cheering some of the weakness since the Jackson Hole meeting last month, as the weaker data increases the probability of further action by the Fed.

The market is at an ironically crucial moment, in which the players want data weak enough to re-engage the Fed but not so weak as to actually lead to recession.

So while the macho types of Wall Street will never admit that they want Fed easing, it’s the mother’s milk they crave, because until bona fide policies of growth are enacted, weak housing and high unemployment are heavy anchors on the economy.

The Fed, sadly, remains the only buoy.