Fed’s High Wire Inflation Fighting Effort Risks Triggering a Recessionary Fall

Imagine a high-wire act performed without a net.  That describes the Federal Reserve’s effort to curb inflation without crashing the economy.  Success will bring applause and relief; failure, a brief downturn, at best, with a prolonged recession the worst case outcome. 

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Putting the best face on the subprime crisis, multi-billion dollar losses, inflation risks recession fears, and other equally distressing headlines dominating the financial news today, you might conclude that these are certainly interesting times. But then, you might also recall the old Chinese curse: “May you live in interesting times,” which tells us that interesting times are also often unpleasant and almost always uncomfortable.

Mortgage industry executives summoned to meet with Treasury Secretary Timothy Geithner last week agreed to do what they can to pick up the lagging mortgage modification pace. But they also complained that the expectations for speedy foreclosure relief were unrealistic given the complexity of the Obama Administration’s Home Affordable Modification Program (HAMP) program, the volume of modification requests, and the need for servicers to hire and train thousands of new employees.

The Treasury Department’s first published review of the Home Affordable Modification Program (HAMP) results to date did nothing to refute complaints that the centerpiece of the Obama Administration’s foreclosure prevention efforts is falling well short of expectations.

If Shakespeare were writing today, he might still advise killing all the attorneys first. But if he followed a current trend, he might also suggest drawing a bead on appraisers as well. Real estate and financial industry trade groups, led by home builders and real estate brokers, are blaming flawed appraisals for depressing home values, delaying real estate closings and exacerbating the housing downturn.