Part of the problem is that the Fed holds their FOMC meeting and takes regional reports from the presidents of the 12 reserve banks reporting on conditions in their region. They bring out their blue and green book and review the stats. The problem is that they are moving like slugs and not able to use any predictive powers but are reactionary to the crisis.

Meanwhile we have congressmen juggling the three autos with 3 million jobs on the right, while Obama is juggling 2 million jobs and energy saving light bulbs for children on the left. Everybody can tell that we come up with a million jobs short.

For some strange reason, nothing at all can happen from now until Obama is sworn in.

As numerous commenters at Calculated Risk have observed, the Fed is punishing savers and investors, while continuing in a Sisyphean effort to bail out speculators by attempting to force the rest of us to direct our money into their failed enterprises, such as, say, real estate and the issuance of CDOs. The Fed is, in effect, telling us there is no way to avoid a global depression unless we rescue the people who caused it through the use of excessive leverage to engage in speculative investments.

In other words, the Fed is confirming to all that it will expend the entire wealth of this society in a misquided effort to salvage the bubble economy of the last 15 years. Or, to put it more crudely, the Fed is providing the leverage that capital markets have taken away. It does nothing to induce confidence among the populace, and, if anything, results in even greater cynicism and a tendency to hold what’s left of one’s money even more closely to the vest.

Absent the institution of reforms, accountability and greater transparency in the global financial sector, I believe that the deflationary cycle will only intensify. To date, there is one thing that Paulson and Bernanke have been consistent about, their unwillingness to take any action to require it. Because if they did, the curtain would fall upon an era of corruption that is even more outsized than the Gilded Age.

Here is my Bertdilbert high school dropout take on today’s action. As you know, the Fed went zero to .25 on the Fed funds rate which is historic. I am going to let Mr. M expound on what this means to home loans and interest rates, that is his expertise. Here is my take on the rest of the story…

First off, there has been this talk of “dollar bubble” floating about town. For any of you that heard this, it is pure nonsense. What do we know about bubbles? One thing is prices go up. Second thing we know is that they are fueled by greed. So let’s move to the 3 month treasury marketplace where people have been piling in for zero % interest. Nope, no greed there! What you witnessed was a flight to safety otherwise known as “fear”. See the difference? No bubble. What we do have though is a concentration of assets. Assets that are frozen by fear, assets that are not making “economy”.

At the same time however, one should recognize that this money can move swiftly if something is deemed to provide lesser risk. It can also be “forced out” if dollars are suddenly perceived to become risky. Calling that a bubble however is about as accurate as the gal on moneyvison saying the housing market bottomed with an uptick on sales – while prices hit a new low. Let’s see how this plays out though into the hand we were dealt today.

First the Fed’s position. The Fed, and when I say Fed, I mean the Open Market Committee, is seeing the exact same thing we are seeing. They look at the treasury market and can see the fear and latching on to dollars for safety. The same exact thing is happening in the less visible private lives of Americans. They to are clinging to safety holding onto dollars.

This frugalness that has suddenly jumped into lives of everyday Americans is like a virus to the economy. If people do not spend money, we in essence have no economy. If 70% of our economy is consumers buying stuff, it does not take a rocket genius to figure out that tightfisting is going to throw us into a hotbed of high crime and 25% unemployment.

The Fed response to tightfisting? Bring out the sledge hammer and smack fear into dollar holdings! Today’s monetary response send a clear message that CD’s Money Market as well as Treasuries are going to be paying you zilch. But they did yet another thing to scare money from out of hiding. They did something to beat money out of the mattress, out of the safety deposit box and out of hiding, wherever that may be. They said in Fedspeak code that your money is about to become worthless.

Bernanke let on that the Fed had other tricks up it’s sleeves that it could use to combat deflation. Of course they don’t want to scare anybody by actually using the “D” word in the statement, rather they say things like “inflation pressures have diminished appreciably”. How about telling it like it really is, that the deflation suction has raised its ugly head!

The Fed let it be known today that anything and everything will be placed on its balance sheet. I have no doubt that this is going to be inclusive of monetization of treasuries and could well entail currency swaps. If you have a pair of dirty socks, send them to the Fed, they will stick that on the balance sheet too. In short, your dollars are going to be depreciated against not only other currencies, but against itself through forced inflation.

Why has the Fed and Treasury taken this approach? For one, they cannot force overinflated dollar denominated asset prices up. They can however devalue the dollar and bring asset contractual agreements back to even. Heck, we may not have to worry about principle reduction on mortgage paper, we might just bring the inflated devalued dollar price of the home back up to the mortgage balance!

Today’s accomplishments by the Fed.

1. Placed fear into dollar holders to spend the money and pull it out of the mattress.
2. The dollar will devalue significantly.
3. Euro will likely be forced up, this is our primary competitor currency.
4. Money to flee dollar holdings – flight to stocks, precious metals, commodities, other currencies.
5. Potential future for real estate as inflation hedge.
6. Potential for taking highly inflationary course to satisfy asset valuation balance sheet problems
7. Expect volatility in the dollar markets, dollar can now be carry traded.
8. Stock up on creamed corn….

Now where are them fellers that were screaming “dollar parity” two weeks ago… LOL

The leave-cream-corn-behind person must still have faith in the system. When that person wavers, we are all doomed.

Maybe Mr. Mortgage, in 6-9 months, they will be discussing/proposing principal reductions as a possible path out of this mess.

Keep up the leading work.

http://www.cbsnews.com/stories/2008/12/12/60minutes/main4666112.shtml

Mr. Mortgage, what are they, like 18 months later than you? Maybe they only report the truth when it’s fashionable.