It's A Pipe Dream, But Worth Writing About

Why the Fed Should Cut Rates Now
Though I wasn't a fan of former Federal Reserve chairman, Alan Greenspan, I will say this for him: He did know when to open the monetary spigots amid a liquidity crisis.
Under Greenspan's tenure from 1987 to 2005, the Fed reacted immediately when liquidity starved the credit market and threatened the financial system.
Greenspan's biggest test was right after he became Fed boss in 1987 when stocks crashed 22% on October 19, 1987. The Fed immediately cut rates by 2 full points. And again, when the collapse of hedge fund Long Term Capital Management threatened global credit markets in the summer of 1998, Greenspan reacted swiftly, providing immediate credit to the financial system.
But Ben Bernanke is a different sort of Fed boss.
In 2007, the Federal Reserve is more concerned with inflation, a misplaced concern considering U.S. home prices are still crashing, suggesting incipient deflation is a concern.
With the ongoing turmoil affecting the credit markets, Bernanke should cut short-term interest rates now or at the Fed's next FOMC meeting. All high-risk segments of the corporate and mortgage-backed market are hemorrhaging. That's a clear warning that there's a credit bubble currently unwinding, threatening the financial system unless immediate liquidity is created to assist all parties and affected counter parties.
Also, the country's banks are coming undone, sliding to new 52-week lows last week as concerns mount that loan losses will increase as sub-prime defaults spread to the next tier of borrowers.
Once again, hedge funds around the world have begun to fail with several high-risk mortgage-backed hedge funds in Australia, England and the United States either near-collapse or teetering on the brink of failure this summer.
The spreads between safe Treasury bonds and other high-risk credits have now hit 52-week highs. That's yet another warning that there is a credit crisis underway. As spreads continue to widen, the scope of this liquidity crisis will spread, slowing economic growth and halting the boom in private equity financing, which depends on stable interest rates to finance debt-backed deals.
Inflation has never been a real concern for the Fed, despite its official utterances to the contrary. Since it's creation in 1913, the Federal Reserve has consistently debased the dollar's purchasing power. But it does score high points for printing money, especially amid liquidity crises.
And now is the time for the Fed to abandon its inflation rhetoric and create immediate liquidity to boost credit and mortgage markets.
C'mon, Ben, do what you boys do best...