What's Bernanke's game plan?

The Federal Reserve moved aggressively for the second time in eight days to lower interest rates and signaled it was ready to do more as needed. But was is Ben Bernanke's game plan for the US economy? Agreed he and the Fed are worried about Recession, the housing market and the credit crunch but I can't help thinking all this short-term tinkering will only make things worse. About a year ago Bernanke was worried about the threat of high inflation in the economy but by cutting rates so aggressively he has opened the door for high inflation and the dollar to take another pounding against major currencies. My worry about Ben Bernanke is that he never seems to disappoint the markets, he always seems to cave in and bows to market pressures he is also treading a fine line and copying monetarists policies from the 1970's that caused havoc on economies and markets, time for Bernanke to "Man up" and not be Mr predictable. The reaction to the rate cuts were as expected dollar weakness and a rise in commodities but if the Fed are so aggressive to cut rates should inflation be a problem will they raise interest rates? Are they really worried about inflation well those countries holding large reserves in US dollars are probably weighing up when is the right time to dump dollars. For all Mr Bush's talk about the resilience of the US economy the basic fundamentals are not quite right, a weak currency $9 trillion dollars in debt, slow growth and rising unemployment all caused by years of bad economic policies and it will take years to put right by the new President.

Let's take a look at what's happening in the UK as house prices fall and mortgage approvals fall to a 13 year low. Bank of England figures show that 73,000 new mortgages were approved down from 117,000 in December 2006- a 37% drop. All this centres around just how much lenders are willing to risk as the credit crunch bites. As sub prime write downs hammer the banks balance sheets the assets (Houses) held by the banks are worth less as owners default and will hardly repay what they have outstanding. Many owners crippled by huge debt are struggling under increased energy prices, travel and food prices whilst salaries have failed to keep pace with rising costs inflation really 2.1% I think not. Meanwhile independent experts think the UK Govt will raise taxes to fund a £8bn shortfall you would think with the rising prices in Petrol and the amount they skimp off us tax payers they would have enough money in the kitty, surely the UK tax payer cannot take anymore?

Over the next couple of days the spot light will be on the Bond Issuers as rating agencies begin down grading their assets. MBIA and Ambac in particular will probably announce huge losses from exposure to residential mortgage-backed securities and collateralized debt obligations (CDOs)

More bad news emerged late Wednesday when Standard & Poor's downgraded hundreds of billions of dollars of sub prime mortgage-backed securities and CDOs. That was the largest number of ratings actions S&P has taken in the sub prime mortgage market so far, exceeding big downgrades in July.

Are we witnessing the unravelling of the Western Financial system? As we end the first month of 2008 I predicted that this year would be rough but I never expected so much so soon. Now is not the time to panic but we can already see we are in for a very difficult year.

Until next time...........