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The Fed's one-two punch, cutting rates by half a percentage point, will not do the trick. The aim of the Fed is make it easier for business with better credit and cheaper money.

But shortly after, Standard & Poor's spoiled the party by signalling it might lower its ratings on $534 billion worth of US residential mortgage-backed securities and other complex debt packages. It suggested these actions could affect bond pricing and liquidity in certain sectors. According to S&P, the downgrades could extend bank losses to more than $265 billion and have a "ripple impact'' on the broader financial markets.

This is worrying news for Merrill Lynch, UBS, Citigroup and Morgan Stanley who have all lost a fortune. It's looking very bleak.

All this coincides with the IMF's world economic outlook warning that things might get worse."Deteriorating economic conditions could exacerbate pressures on major financial institutions that have already suffered big losses from the subprime crisis. A possibly deeper economic downturn in the United States or elsewhere could also serve to widen the crisis beyond the subprime sector, as credit deteriorates more broadly … Already delinquency rates in 2007 vintages of US prime mortgages (those to the most credit worthy borrowers) are rising faster than in previous years, albeit from low levels, and other forms of consumer credit show signs of deterioration."

Add to that the problems confronting bond insurers with MBIA, posting its biggest ever loss for a three month period and Fitch Ratings downgrading Financial Guaranty Insurance Co. Credit-rating downgrades at major bond insurers could cause banks to take another $40 billion in write-downs in 2008, reports The Wall Street Journal.

Why is that important? Simply because banks, state and local governments and other issuers in the US and around the world will be facing increased costs and losses.

The worrying part here is that things do not seem to be easing up at all with RealtyTrac, a California real estate research firm estimating that 79 per cent more more US homes entered foreclosure last year than in 2006, reports Forbes.

So what does all this mean? Simply that the Fed has once again misunderstood. The problem is about insolvency and ham-fisted monetary policy will do little to address a credit crisis.

As my favourite doomsayer Nouriel Roubini says in his blog: "The reaction of the stock market to the unexpected 75bps cut by the Fed last week and its reaction today to the further 50bps cut clearly shows that markets and investors are now fully realizing that the US economy is suffering from serious credit, i.e. insolvency, problems, not just illiquidity ones; and that Fed monetary policy can partly tackle illiquidity problems but cannot resolve insolvency ones … So both following the 75bps cut last week and the 50bps cut today the stock market told the Fed: "it's not just an illiquidity problem; it's most importantly a credit or insolvency problem we worry about, stupid!" And the market reaction on both occasions highlights the relative impotence of monetary policy in addressing credit problems."

Talk about clueless!


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