Tuesday, November 27, 2007

What Next?

So now that countrywide is toast, what next?

I think that the blame for this debacle will fall mostly on Moody's (ticker symbol: MCO). They help investment banks package "dodgy mortgages" into packages (CDOs) and then publish credit ratings on them. They are the ones who have "blessed" these CDOs as AAA rated (same as US government debt) so that pension funds and bank savings accounts can invest in them. They are rapid losing all credibility.

The Federal Reserve Bank is in the horns of a dilemma. They can cut interest rates to increase the money supply so that troubled banks can raise cash; however, this causes the dollar to fall against foreign currencies and commodities such as oil and gold, and increases inflation.

The question is, how long will the Fed keep it's inflationary policy of cutting interest rates. My cynical view is that they will keep cutting rates until the fat cats trade out of their positions, then they will increase interest rates and look out below! Otherwise they will end up creating a market bubble, probably in a different market, such as oil or gold.

If you don't think the Fed would do that, consider that that Federal Reserve Bank is privately owned by it's member banks and has a fiduciary duty to act on their behalf. I'm not getting on a soapbox about that fact. I don't care. I just understand it and profit from it.

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