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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Combining two combustible issues is not usually the recommended strategy for shepherding legislation through Congress. But by adding regulatory reform for the Government Services Enterprises) to a bill providing assistance to homeowners facing foreclosure, Sen. Christopher Dodd (D-CT), chairman of the Senate Banking Committee, has managed to secure strong bipartisan support for both.

All those supposedly irresponsible consumers who “recklessly” borrowed too much money to buy homes they couldn’t afford are bad enough. But now, we’re told, people who can afford to make their mortgage payments are walking away, simply because they now owe more than their homes, located in depressed real estate markets, are worth.

The subprime induced financial crisis seems likely to achieve what political pressure, an accounting scandal and withering criticism could not – stronger regulatory oversight of the giant government services enterprises (GSEs), Fannie Mae and Freddie Mac.

Stop the presses! We’ve found some good news peeping through the economic headlines in recent weeks. The grim reaper news still dominates, to be sure, but more upbeat – or at least, less downbeat – comments and statistics are altering the tone, if not the substance, of the economic discussion.