Longtime Barron’s D.C. man leaves with pessimism intact

Jim McTague‘s last “D.C. Current” column for Barron’s offers little comfort for those seeking good news about the future of American politics and public policy.

My pessimism is grounded in the dogged unreality of Washington. Protracted Federal Reserve interest-rate policies, and a six-year fiscal stalemate between Congress’ mulish Tea Party and our overly zealous European-style socialist president, have distorted the economy the way a fun-house mirror twists light. Interest rates are artificially low. As a consequence, businesses that would be squeezed to death in a higher-rate environment putter along. Today’s low rates mask gross economic inefficiencies.

I expect things will get better in the long run — but worse in the short run — when interest rates normalize. As Warren Buffett famously said, “You only find out who is swimming naked when the tide goes out.”

So be prepared for a resulting cavalcade of corporate derrières that will upset our markets. As for the exact timing of the dramatic event, I have no idea. Bears have weak eyes, compensated for by a powerful sense of smell. There’s a strong odor in the air, but I can’t discern if it’s in the backyard or halfway down the block.

The Fed’s extraordinary asset-buying and interest-rate sleight-of-hand since late 2008 prevented the Great Recession from turning into another Great Depression. The central bankers merit our heartfelt applause for this feat. But then, the Fed based its game plan on a flawed assumption: that the president and Congress would accept the baton from its hand and implement an intelligent, growth-oriented fiscal policy. This, in turn, would have allowed it to raise rates years ago as the economy regained its former vigor. Ben Bernanke, when serving as Fed chairman, pleaded with Congress on a semiannual basis to run the last leg of the recovery relay — and the distempered body repeatedly declined.

WE NOW FIND OURSELVES in a place vaguely reminiscent of the 1980s, when interest rates soared to unimaginable heights and oil prices unexpectedly collapsed.