THERE WERE SOME ON WALL STREET WHO GOT THE WRONG IMPRESSION WHEN THE FED LOWERED ITS FED FUNDS TARGET TO 4.75% AND AT THE SAME TIME CUT THE DISCOUNT RATE ANOTHER HALF-POINT.  THEY BEGAN TO SAY THAT DESPITE HIS LIFETIME OF WRITINGS AND HIS LONG TRAIL OF SPEECHES, BEN BERNANKE WILL TURN OUT TO BE A CARBON COPY OF FORMER FED CHAIRMAN ALAN GREENSPAN.  I FEEL SORRY FOR THESE FOLKS BECAUSE THEY ARE HEADING TOWARD BITTER DISAPPOINTMENT WITH THEIR PREDICTIONS.

FED CHAIRMAN BEN BERNANKE HAS NOW LOWERED THE DISCOUNT RATE A FULL POINT BECAUSE HE WANTS BANKS SOLID AND STABLE ENOUGH TO QUALIFY FOR IT AND TO USE IT.  THAT IN ITSELF IS A COMPLETE TURNAROUND IN POLICY FROM GREENSPAN.  AT THE SAME TIME, BERNANKE HAS SENT POWERFUL SIGNALS TO EVERYONE WITH EARS TO HEAR THEM AND EYES TO SEE THEM THAT HE MIGHT NOT HAVE PLANS FOR FURTHER CUTS IN THE FEDERAL FUNDS RATE.

HE HAS DONE THIS BY STRESSING THAT THE FED CONTINUES TO BE WORRIED ABOUT A POSSIBLE RESURGENCE OF INFLATION.  SOME PEOPLE THINK HE IS NOT SERIOUS ABOUT THESE WARNINGS.  I COULD NOT AGREE WITH THEM LESS.  INFLATION IS REALLY HEATING UP INSIDE CHINA, JUST AS BERNANKE WARNED THEM LAST DECEMBER ON A VISIT TO BEIJING WAS LIKELY TO HAPPEN BECAUSE OF THEIR INEPT POLICIES OF HANDLING MONEY. 

DESPITE FIVE RATE HIKES THIS YEAR BY THE COMMUNIST-RUN STATE, INFLATION CONTINUES TO CLIMB AT A SWIFT RATE.  IT IS ALREADY UP NEAR 7%.  IT CONTINUES TO MOVE UP FASTER THAN THE BASE INTEREST RATE.  THAT CONFIRMS WHAT YOU AND I AND CHAIRMAN BERNANKE ALL KNOW TO BE A FACT - NAMELY THAT RAISING INTEREST RATES CANNOT CONTROL INFLATION.  BIG JUMPS IN THE MONEY SUPPLY CAUSES INFLATION.  CHINA IS EXPERIENCING THAT.  AND THEY ARE SEEING MAJOR SPECULATION IN REAL ESTATE WITH HUGE PRICE JUMPS.

Because China is now sending its inflation to America in the form of higher export prices, the Fed's hands are tied in terms of its ability to flood money into our system and help shore up American housing prices. The past couple of weeks have made it plain that Bernanke and the Fed have turned away from what looked early in the month as an all-out effort to blast buying power into the hands of American homebuyers.

The same is true when it comes to cutting interest rates quickly and deeply.  You have probably noticed that the 10-year Treasury note yield has now come back up to almost equal the new Fed Fund rate.  Not so many weeks ago a gap approaching a full point had opened up between these two rates.  That suggests to me that the free market now believes Bernanke has allowed the fed funds rate to slip as low as he wants it to go (for now).  It is back at the level where he found it on February 1, 2006.  You know I told you he would get it back down there.  Now he has done so.

There are other ways to restore health to housing, and from the looks and sounds of events this week Washington is nibbling at all of them.  The Senate has moved on FHA reform legislation that will raise limits on individual mortgages, while dropping the 3% down payment requirement and expanding the FHA's flexibility in granting mortgages.  Chairman Barney Frank at the hearing in the House yesterday spoke of acting fast on similar legislation.  And Secretary of Treasury Paulson said yesterday the White House is ready to allow Fannie Mae and Freddie Mac to expand their mortgage loan portfolios and increase the size of mortgages they can buy.

They will also allow the purchase of mortgages when homeowners have slipped behind on mortgage payments, to offer them a fresh start with new terms.  There is, however, still strong hostility when it comes to bailing out speculators who bought multiple housing units with no money down and also speculative buyers on credit of segments of subprime loans with low teaser mortgage rates.  Big financial firms are having to swallow losses there.  The purpose of such toughness is to discourage repeat performances.

I think it is possible we will see at least a half- million foreclosures before this crisis is over.  (One half of 1% of all homes.)  But I believe Greenspan is off course in his expectations of large price declines.  Bernanke says he is focusing on keeping the overall economy healthy and I believe him.  That is indirect but it is the best way to boost demand for houses, new and existing, and then get building moving again.  More next week.  Adrian Van Eck.

Gail Gladstone, Long Island Realtor