Who is to Blame? Bush or the Fed?

Let's face it. The economy is pretty scary. The real test will come this week (April 29/30, 2008) with the FOMC meeting. If they continue to drop the Fed Funds rate that will indicate that the credit crisis is still a major hazard on the horizon. If they keep them the same or raise them it will indicate that they are on to the major inflation problem that has emerged both in the US and around the world. That is the future. What about the past?

The dot.com crash of 2000 (ff @ 5.75%), 9/11/01, and the Enron/telecom crash of 2002 freaked out Chairman Greenspan and the Fed took the Fed Funds rate to 1% in 2003. 1%!! The housing market boomed with low interest rates and speculation hype as everybody and their mother began to feel they had to buy a house or lose out. Add a new credit chain that bypassed the traditional S&Ls and channeled mortgages into commercial bonds that were then sold internationally through unregulated OTC markets.

We can thank the repeal of Glass-Steagall, the benchmark regulation of the New Deal that separated brokerages from banks, for this new credit system as it allowed investment banks into the mortgage business. OK, that was done during the Clinton administration. Commercial lenders such as Citigroup began to underwrite and trade these mortgage-backed securities and collateralized debt obligations. Becoming ultimately a $45 trillion dollar business!