There is no "credit shortage" out there. There is a "stupid credit shortage," though, and that is actually healthy. Sally and Paul who want to have $400,000 loaned to them with no money down, no credit check and pay interest only for two years probably will begin to find this more difficult, if not impossible - and you know what, this also is good. Bernanke will not finance stupidity by flushing the market with funds to bail these folks out.
What will he do? The same thing he has done since taking office - nothing. He is watching inflation and until that is under wraps, rates will stay where they are, at historically low levels. The economy is growing at a very healthy and retrained rate, unemployment is virtually non-existent, corporate profits are growing at near double digit rates and corporations are so flush with cash they are buying back their own shares at a pace never seen before. So, just because the DOW and S&P drop 4%, we should just abandon the plan and lower rates to re-energize the fools who got themselves in a hole in the first place? No way . . .
Here is proof of why emotion should not rule the Fed. Watch Jim Cramer, in a WWF's Vince McMahon inspired act have a Fed meltdown two weeks after saying sub-prime is "completely meaningless, it has no meaning whatsoever." Laughable.....
Sam Zell was on CNBC last week and he was talking about housing. He said simply that there was no "meltdown" and that housing starts were slowing to historically normal levels. The last three years were an aberration and at 1.4 to 1.6 million starts, we have settled into a "normal" range. Since when did normal require a rate cut?
I think Greenspan enjoyed the market jolting effects of his incoherent ramblings when at the Fed. This is proven by his inexplicable clarity since he left office as exemplified by his call of a "1/3 chance of US recession in 2007." He misses the rush of the market reacting to him. Bernanke has no such desire and if anything, seems to wish the Fed to fade to an after thought when it comes to the markets. If the Fed becomes real predictable, the effects of their actions is minimized. Once Wall St. figures out that rates will not come down until inflation is well under wraps, we can end this speculation every month or two. We can talk about a rate cut when we see proof that inflation is waning.
If you want to know when to panic, it is easy; the day Bernanke surprises us with a rate cut, things are far worse than we think.