The cut in the symbolic "Discount Rate" by the Federal Reserve Open Market Committee one week ago Friday was nothing more than a psychological move in a weak attempt to alter investor psychology. Even as we speak the Fed continues to pour liquidity into the banking system like a drunken sailor in an effort to prop up the mortgage banking system. Yesterday, the Fed purchased $18 billion of fixed income securities alone indicating things still have not calmed down. Also yesterday, Bank of America invested $2 billion in Countrywide Financial in exchange for a 16% stake after Countrywide started experiencing problems raising money to fund loan originations.

A more profound move would have been a reduction in the "Federal Funds Rate" since this rate affects the costs consumers pay for credit directly (e.g. credit cards, auto loans, and mortgages). The Discount Rate affects the cost of funds for Federal Reserve member banks to borrow directly from the Fed, nothing more.

Moody's Investors Service estimates the amount of sub-prime (FICO Score below 620) and Alt-A (FICO Score 620-680) loans total some $2.5 trillion. The loans have been packaged into securities known as Collateralized Mortgage Obligations (CMO's) and Collateralized Debt Obligations (CDO's). The problem is these higher risk loans were blended with higher quality loans, then sold and re-packaged and re-sold again. This process has increased the difficulty in determining what risk the end investors who bought the CDO and CMO instruments have assumed. Additionally, many of these loans have requirements that force the original lender to re-assume the loan in the event of a default. This unknown question has made the risk on the mortgage securities too high for many investors causing the instruments to sell at significant losses.

Compounding this problem for the economy is the fact that existing home market values and new home prices have started a precipitous drop due to accelerating foreclosure rates and a bulging new home inventory. One homebuilder in Highland has dropped prices 15%, throwing recent buyers in the development out of bed overnight, and other local builders are cutting staff and overhead. Buyers who financed in 2005, 2006, and the early part of 2007 using adjustable rate structured loans are continuing to reprice to higher rates, but due to their tighter loan to value ratios can no longer refinance due to lender requirements.

San Bernardino County property transactions are down roughly 45% from two years ago and continue to deteriorate, while foreclosures continue to accelerate.

Many consumers have been tapping home equity as a source for financing other purchases can no longer do so furthering an economic slump since two-thirds of Gross Domestic Product (GDP) is fueled by consumer spending.

I attended a conference of the Northern California Assessor's Association earlier this week. I was able to hear Gary Zimmerman, Economist for the Federal Reserve Bank of San Francisco give a presentation on the economy. Zimmerman was clearly guarded in his comments and indicated that projections on the economic performance was likely to be revised downward.

Those who put a rose colored picture on this long-to-unfold debacle are only in denial.