Pundita is having a déjà vu feeling. Listening to President Bush assert that there will be no government bailouts in response to the widening credit crunch, I recall that awful photo of him surveying Katrina's damage from his jet window. Listening to assurances from the Fed that the markets are healthy enough to withstand the turmoil, I recall Michael Brown's assertion that FEMA was doing everything possible to bring relief to Katrina victims.
I have read the latest opinions of central bankers here and abroad; I understand their worries about inflation if interest rates are cut, and their determination to see less risk in credit markets. But one would think they were talking about speculating in pork belly futures. At the bottom of the investment and credit market turmoil is not a bunch of professional speculators or even lending sharks; it's Americans losing their homes.
So, for the US government, the key questions should be: How many Americans are holding adjustable rate mortgages? How many of those Americans can keep up with mortgage payments if the rates double or triple?
In short the Fed, the White House and Congress should be looking for an estimate of projected foreclosures within the coming six months, and basing intervention decisions on that.
If they can't do an estimate quickly, or if the estimate is very bad news, the Fed should err on the side of caution and not wait until September 18 to consider a rate cut. If they wait too long to act, the Fed can repeat FEMA's too-little too-late response to a disaster.
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