Robert Novak

WASHINGTON -- The unexpected, widely praised cut in the discount rate last Friday only momentarily removed pressure from the Federal Reserve. While the Bush administration and conservative economists deplore bailing out improvident investors, leaders of the mortgage finance industry consider it unthinkable that the central bank will not take decisive action.

A cloud of fear will hover over the Federal Open Market Committee (FOMC) when it meets Sept. 18. More than impecunious homebuyers and reckless hedge fund operators are afraid. The failure of reputable lending institutions plants apprehension about a general housing slump that will guarantee an economic slowdown and threaten recession. Republican businessmen look to Washington for help. They want an interest rate cut -- and more.

Secret plans carefully laid by Federal Reserve Chairman Ben S. Bernanke for a gradual, non-inflationary easing are no longer operative. The real world has impinged on desires to cut the federal funds rate by the end of the year. With Congress in its summer recess, Senate Banking Committee Chairman Christopher Dodd (seeking to revive his moribund presidential campaign) summoned Bernanke to his offices Tuesday to demand action now.

Prominent supply-side economists warn against precipitous action with ruinous results for the economy. Last Sunday, consultant (and former Fed governor) Lawrence Lindsey told his clients that monetary policy will be "neutral to restrictive for quite some time." On Monday, Bear Stearns economist David Malpass said "credit market turbulence . . . marks the end of the U.S. and global reflation." In The Wall Street Journal Monday, economist Brian Wesbury wrote that "even very easy money today can't put off the day of reckoning for subprime mortgage holders who bought homes with no money down and thought interest rates would stay low forever."

The private analysis at the upper reaches of the Bush administration has been that the credit crisis was limited to subprime lenders. The frightening developments of the past week reflect a different story -- afflicting jumbo (over $400,000) mortgages, other housing and the broader economy.

-- On Aug. 3, American Home Mortgage, based in Melville, N.Y., closed its windows to borrowers and ceased operations (laying off all but 750 out of more than 7,000 employees). It explained: "Conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative."

Robert Novak

Robert Novak (1931-2009) was a syndicated columnist and editor of the Evans-Novak Political Report.

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