The Federal Reserve

So how smart are these guys?

Why did they wait so long to start stimulating the economy?

How secure is their balance sheet?

Who is going to prosper as the economy recovers?

The San Francisco Federal Reserve just released their revised forecast for the next year. They are projecting that this recession will be deeper than the one in 2001, with unemployment peaking at about 7.5% in late 2009.

They are showing negative GDP growth over the next 3 quarters, and then a rebound to 4% positive real GDP growth by the 4Th quarter of 2010. They are showing 4 quarters of negative growth, with the most severe being the 4Th quarter of 2008 at a drop of about 3.5%.

They are showing an increase of debt on the Fed's balance sheet as of today's date at about $1.1 Trillion.

With monetary policy at near-zero on interest rates, they suggest that they have three strategies to stimulate the economy. The strategies are:

1. Keep funds rates low for enough time to stabilize financial conditions.

2. Continue to alter the Fed's balance sheet by selling Treasuries, and by buying commercial paper, agencies, etc.

3. Continue to increase the size of the Fed's balance sheet.

It seems to me that the whole point of this exercise is to get more money and confidence into the hands of consumers, so that there is an outlet for the goods and services of businesses.

Commodity prices have finally come down. But lending costs on mortgages and corporations have not. In fact the lending costs to most businesses has gone up tremendously.

Dear Dr. Bernanke:

It seems reasonable that the next target of reducing costs so that consumers can afford housing and other goods and services is to reduce the borrowing costs of individuals and businesses.

The San Francisco FED in their report showed investment grade corporate bonds at near 10% and high yield bonds at near 20%.

This sounds like a good recipe for more bankruptcies, higher unemployment and more trouble for consumers and businesses.

Thanks for the efforts you are making and best wishes to you as you navigate through these treacherous waters.

My neighbor, Dave Free, gave this advice yesterday. He said that his father always told him to:

Accentuate the positive.

Eliminate the negative.

Latch on to the affirmative.

And avoid what's in between.