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The Fed only makes cuts of that size when they are very scared of something.

Curious that the cut was enacted at the same time that the Fed chair Bernanke was also saying publicly, ""It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions."

Bernanke clearly wants the losers in the Sub-Prime meltdown to take their lumps.

Instead he justified this large rate cut by saying it was in order to, "to try to get out ahead of the situation and try to forestall potential effects of tighter credit conditions on the broader economy."

What "situation" is the Fed scared of?

In one word ... Recession

What he is essentially saying is, "Look ... this rate cut is not for you folks losing money on bad mortgages and their derivatives, it is because something supremely nasty is on the horizon and we want to soften the blow."

I can imagine the Chairman cringing as he checked the 1/2 point box, hoping the wall street traders didn't interpret it as a bail out.

Here's why they are scared...
Several Fed Governors, including Fred Mishkin, are predicting a whopping 10-50% fall in single family housing prices depending on the market.

This lays a double whammy on the economy.

1) Consumer spending will be dramatically slowed because consumers will no longer be able to tap their homes for equity. The "Wealth Effect" caused by the run up in home values in the last 5 years is officially dead.

2) The fallout of the Sub-Prime collapse is only just beginning. If you examine the amount of "at risk" loans on the books, only 10-20% of the foreclosures expected have actually occurred. This is just the beginning of the ripples.

Our job as investors is to find the Commercial Real Estate Silver Lining in the coming Recession.

Wait... look in the footnotes of the Fed's discussion and it is right there...

With so many former home owners now flooding into the rental market and rental availability tight in many cities, the Fed governors expect rental rates will climb steeply... approaching 4% annualized in the last quarter of this year. AND vacancy rates will fall.

Bernanke himself is indirectly telling us to buy Multifamily.

Compare the positive expectations for Apartments to the effect a nationwide Recession would have on the Retail and Office markets

With the Fed's crystal ball telling us macroeconomic forces point to an explosion in rental demand ... its time to go into Multifamily buy mode.

 

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