CHESSNOID

The federal reserve cut rates a quarter point again last Wednesday after a half percent cut last month. This is a lame attempt to ease a credit crunch that has already taken a strangle hold on the economy. The stock market has been rallying lately as technology companies have done great this last quarter.

The financial sector has been bringing it down. Major mortgage companies and banks have been putting out negative news about poor earnings results. This is a result of a housing bubble run up for the last 6 years. Now that the housing appreciation has halted and the subprime loans are coming to light, many investors don’t know what to do. Everyone is trying to figure out which way the economy is headed. According to Money.CNN:

Banks have taken massive hits from risky mortgage securities in the third quarter. Merrill Lynch wrote down $7.9 billion, and Citi took a $2.2 billion markdown due to mortgage-backed securities and credit trading losses.

Fears of more writedowns have stoked credit worries and raised investor anxiety. The Dow Jones industrial average plummeted 362 points on Thursday – its fourth-biggest point decline of the year – and kept falling on Friday.

Stocks in the financial services sector led declines. Merrill stock sank 8 percent in morning trading on Friday. Citi shares fell about 2 percent and are at their lowest level in more than four years.

The pain from the subprime wipeout isn’t likely to abate anytime soon. Mayo said mortgage problems could cut bank earnings by 10 to 25 percent over the next two to three years.

The crisis has turned up the heat on Wall Street CEOs. Merrill chief executive Stanley O’Neal stepped down earlier this week amid mounting criticism of the firm’s risk management practices. Citi’s Chuck Prince and Bear Stearns’ James Cayne are also facing scrutiny.

I think the answer is obvious. We are definitely headed for a recession which isn’t necessarily a bad thing. We just need to prepare for a tougher economy for a few quarters.

The housing debacle is about to gain momentum. Many have argued that the housing bubble didn’t exist and that the prices of homes will never go down. That argument has been going on for about 3 years, so now we are at the point we can say prices will not continue to increase. Many people think this is the bottom. Based on the projections of many bank analysts of when the subprime mortgage rates will reset, it doesn’t look to bottom out until the middle of next year when the biggest number of loans reset. That will be when we have a record number of foreclosures because homeowners who didn’t qualify on regular loans will be slapped with double or triple the amount of their teaser loan house payments. I think investors who speculated on the housing market will simply walk away. They too will have increased mortgage payments but they will be looking to cut losses on an asset falling in value. Almost like picking the wrong stock at the worst time.

As far as interest rate cuts, the federal reserve will be hard pressed to keep cutting interest rates especially when it affects other global currencies. This has also helped to push the price of crude oil lately. The US is already affecting other economies and may actually be the cause for a global recession. Again, the federal reserve needs to fix the problem and not just put a band aid on it. The federal reserve will no longer be able to cut rates for very long because they are so low already. It really is that simple. The business cycle just has to run its course.

For those who have waited and saved their money for a rainy day, the time to get good deals will be soon. As the inventory of houses and condos rise because of slower sales and increasing foreclosures, the prices will fall. The basic economic principle of supply and demand will continue to work and put the economy in check. The US economy will be going down in the near future, but I am hopeful it will return back to normal after a few years.