I came across this Washington Post article about round two of the credit crunch. It raises some interesting points that I'd like to comment on.

1. There is a 20% chance (according to futures) of the Fed cutting by 50 basis points in December. I'm drooling all over the keyboard at the thought of that! How much would that make the dollar drop? How high would gold and oil go?
2. The mortgage problems could reduce by $2 trillion the amount of credit available to consumers and businesses. A billion ain't what it used to be, but once you're talking a trillion bucks, you're talking money. Last time I checked, the US economy was about $12 trillion a year. One would think $2 trillion less might have a negative impact, unless you are an economist. Being special as far as I can tell, economists only make rational economic decisions, don't eat, don't drive to work and can figure out how absolutely everything is a net positive for the economy.
3. A former Fed Governor identified 3 low probability risks to the economy: (1) A major financial institution could fail; (2) Fannie Mae and Freddie Mac are more exposed to mortgage problems than the market factored in; and (3) the market could lose faith in the companies that insure debt against credit losses.
   

I'm not sure if the above-mentioned ex-Fedhead has read the paper lately. The GSE's are NOT holding up well. Fannie (FNM) is trading at $28.50. It's down 30% this week and it was trading north of $65 last month. Freddie (FRE) is also hurting. It closed at $27.60. It has fallen 34% this week and was also trading above $60 last month. The credit insurers aren't instilling a lot of faith either. MBIA (MBI) has a chart that Olympic skiers would fear. On the bright side, a major financial institution hasn't failed yet.

SunTzu