BCA Chart: Echoing Cramer?

Hyperanimated financial pundit Jim Cramer made the case last week, during discussions on CNBC about federal stimulus packages, that the specific problem affecting markets was the uncertainty surrounding bond insurers, and that therefore the most targeted and effective response would be a supervised industry takeout, to speed up the bankruptcy and recapitalization process, akin to the S&L bailout of the late 1980s and early 1990s. However the guy rubs you (we like to tell people who hate his style, "it’s a Philly thing, don’wurryaboudit"), it was an interesting observation. Regular readers know that, while we’ve acknowledged the overleveraged position of certain economic sectors, we’ve mostly been harping on the longer term issue of global tax competition. But judging by this chart from their website today, the BCA appears to side with Cramer:

Here’s an excerpt from the rather pessimistic assessment accompanying the graph:

It is too late for the Fed to prevent a recession, they cannot rescue monoline insurers, and they cannot turn bad paper into good paper. But engineering a positively-sloped yield curve will help financial intermediaries, and ultimately will put a floor under the economy.

On those first two, we don’t know. On the third one, we would qualify it: if misguided Fed policy has been responsible for good paper turning bad, then better policy can reverse the process (in this case, we think that easy central banks incentivized the creation of paper that was bad to begin with). Engineering a positively sloped yield curve should be positive for financials and cyclicals, and it may indeed put a floor under the domestic economy. But our base case still holds–supporting the U.S. economy thru monetary policy is likely to increase inflation pressures.