Mortgage mess: Fed helping fraudsters or homeowners?

While I was busy putting CLIPS together this morning, the Bloomberg newsfeed brought word that the Federal Reserve had --

"unexpectedly cut the discount rate and said it's prepared to take further action to 'mitigate' damage to the economy from the rout in global credit markets."

The cut of half a percentage point -- to 5.75% -- on the discount rate, the rate the Fed charges to lend money to banks, leaves the benchmark federal funds rate target unchanged.

To gain liquidity in the market, this is no doubt a wise move.

You and I must worry, however, whether this portends a bailout of the fraudsters who have got us in this mess to begin with. (For more on that, read the in-depth investigation by the Financial Times/UK here.)

Paul Krugman, the NY Times' OpEd economist also touched on this issue this morning in his column, "Workouts, Not Bailouts". (More here, thanks to Truthout.)

I'm for Krugman -- with the proviso that a homeowner should get a workout on the ONE home they own that they live in. Screw those sharks that were speculating with buy-and-flips. Let them eat the CDs and books they bought from the make-a-million-with-nothing-down hucksters they learned it from on TV -- and die.

But back to Krugman: You must understand that thinking of the 'little guy' does not come easily or naturally for these erstwhile titans of finance and banking who are running the show.

They mostly just think of taking care of themselves and staying out of jail.

Maybe they should make fraud on this scale a capital crime.

Would that deter anything?

Meanwhile, financial interests are falling over themselves to point out every little silver lining or peeping rosebud they can dredge up.

But keep this in mind: The credit markets have seized because nobody knows the true value of anything right now. And the unfinished business in all this is the CDOs (collateralized debt obligations) with fictionalized golden AAA ratings that the subprime mortgages were spun into like Rumpelstiltskin's straw.

When these trade, all the other CDOs must adjust their (inflated) values in the direction of the value set by those just traded. Can you guess which direction that might be?

Stay tuned, the drama's not over yet.

---

More info --

• Bloomberg: "Fed Cuts Discount Rate to 5.75% to Ease Credit Crunch"
• Bloomberg: "Fed Board Statement - Full Text"
  
• NY Times: Paul Krugman: "Workouts, Not Bailouts" -- Read free here.
  
• Financial Times/UK: "Mortgage Fraud: Payback Time" -- archived here.
  

-- Dan Damon

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ARCHIVED POSTS OF PLAINFIELD TODAY FROM 11/03/2005 THROUGH 12/31/2006 ARE AT
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