The Fed Gets New Glasses: Sees What’s In Front Of It’s Nose


Here’s a quote that should make everyone feel better this holiday season. It’s from the chief domestic economist at Morgan Stanley and is in a report to clients as reported by the New York Times.

“A mild recession is now likely, with no growth for the year ahead.”


And, based on what the Federal Reserve just did–cutting a key short term interest rate another quarter of a point down to 4.25 percent–I’d say the Feds are finally getting as worried as most of the rest of us already are.

If that is not bad enough… there was disagreement among some Board members…one was not happy at all by the decision to lower rates. He thought it should have been lowered even more, a full half-point chop.

When Board members start arguing amongst themselves over how dire things really are and how much Federal intervention may be needed, you know it is time to start looking around to make sure you’re near a lifeboat before the ship sinks.

According to the Times report, both Ben Bernanke, the Fed chairman, and Donald Kohn, the vice-chairman, have, in recent days, “expressed concern that subprime mortgage problems might be making banks and other lenders reluctant to lend not only for housing but for other activities as well.”

Really? No kidding guys?

So, how bad are things in subprime land right now? For the last three months of this year, the growth of our economy appears to have sunk to maybe 1 percent. This is not good news, folks.

Want more bad news? Well, of course not, but you might as well get it anyway seeing as it’s your economic future that is at stake: Housing sales and prices are now down just about all over these united states–the subprime mess having grown like a cancer from a problem for the two coasts to a problem for us all.

But, perhaps the biggest indication of just how concerned the Fed is, is this fact: It has lowered the short term interest rate for the third time now in just about four months. Needless to say, after each reluctant cut, the Fed felt confident enough that it had done enough to keep the ship of state afloat. Guess what guys, the water is already over the deck and rising in many places and for many people.

We have also been “treated” to the great plan that President Bush said he had to help out many who face the real prospect of becoming homeless just in time for Christmas. Problem is, hardly anyone who has taken a closer look at the “plan” thinks it will work.

For one thing, hardly anyone will actually qualify to have his adjustable rate mortgage frozen for the next five years or so because the guidelines raise the bar so high, most people would have to cut their heads off and hold it with arms stretched skyward to reach it.

And then, there is this: The whole damn thing in all voluntary anyway. Meaning, no bank or lending institution has to do anything if it doesn’t feel like it. Great plan!

So,now what? The truth is, no one actually knows because we haven’t gone down this particular road before. That means you must take every “expert” opinion you read or hear with a boulder of salt. Wall Street doesn’t know what will happen next. The presidential candidates, Republican and Democrat alike, don’t know. Academics don’t know. The Federal Reserve doesn’t know. We may all be in this together, but sure would be nice if someone at least brought along a flashlight.

About Author

Charles is currently reporting for KNX Radio in Los Angeles, is the co-author of the book No Time To Think, and can be found commenting about the news on his blog, The Feldman Blog, as well as on The Huffington Post.


  1. If I am not mistaken one of their requirements will be that you are not behind on payments. Isn’t this the person that we should be trying to work with? They are the one’s that need it most, because obviously they ultimately will end up foreclosing if they are behind. Once people get behind it is difficult to get caught up.

  2. Many people get caught up in the idea that the Fed cutting rates will fix everything (watch how Wall Street reacts). There is a law of physics that states that every reaction has an equal and opposite reaction, the same is true of a rate cut. Domestically the rate cut hurts fixed income investors when the rates drop on CDs and other investments tied to interest rates. Globally the rate cut will cause the dollar to fall resulting in higher prices for anything imported. Did anyone notice the rise in oil prices after the last cut? These cuts have a way of increasing inflation so that we ultimately pay a heavy price for the cut that everyone is screaming for. It’s the old adage: you can pay me now or you can pay me later, but pay you will.

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