Despite the slide in the stock market, long-term rates held high (3.65 percent for the 10-year T-note and 5.125 percent for mortgages), propped by the Fed’s insistence that that the economy is "strengthening," and an adjustment-bloated, 5.7 percent surge in fourth-quarter U.S. gross domestic product.

News of some stability in home prices was offset by big drops in December sales: Existing-home sales collapsed 16.7 percent, the worst ever measured, and new-home sales fell 7.6 percent. Apologists pointed to weather and to the expiring home-purchase tax credit; others noted that December is often cold, and the credits were renewed and amplified.

Despite the slide in the stock market, long-term rates held high (3.65 percent for the 10-year Treasury-note and 5.125 percent for mortgages), propped by the Fed’s insistence that that the economy is "strengthening," and an adjustment-bloated, 5.7 percent surge in fourth-quarter U.S. gross domestic product.

News of some stability in home prices was offset by big drops in December sales: Existing-home sales collapsed 16.7 percent, the worst ever measured, and new-home sales fell 7.6 percent. Apologists pointed to weather and to the expiring home-purchase tax credit; others noted that December is often cold, and the credits were renewed and amplified.

President Obama said in his State of the Union address that he had not explained health care reform with sufficient clarity. That’s not all: to date, no one in authority has clearly explained how we got into this financial crisis, or how we will get out of it, or how to avoid doing it again.

Caught in this trap, in the absence of compelling fireside chats, the nation and Congress have begun to chew legs — their own and anyone else’s within reach.

The Fed now has tooth marks all over its marble pillars, and a brief historical explanation may take some pressure off chewers and "chewee" alike.

The Fed was created by Congress in 1913 as an antidote to the frequent "panics" that plagued banks and the economy. Hence its No. 1 duty: "lender of last resort."

As it has loaned our way out of crashes (missed only once: 1930-32), it has inevitably loaned to miscreants partly responsible for the mess; however, all citizens today disturbed by "bailouts" should understand that it is we who have been bailed.

When the Fed is not intercepting immediate disaster it reverts to job two: stable prices via an economy neither too hot nor too cold — aka "monetary policy."

It does so by manipulating the cost of money to banks, for years on end tweaking and fiddling until a moment of serious inflation. Then the Fed must do the only thing it can: jack rates high enough to throw millions out of work (missed on that one only once, too: 1977-79).

Work like this is best done not merely in secrecy but invisibility. There is no central bank in the Constitution: the Fed is an un-democratic star chamber often accused (falsely) of all sorts of conspiracies. …CONTINUED

We know that Congress and the president cannot be trusted with money, and certainly we can’t trust ourselves, so we appoint the best few dozen people that we can find, give them infinite power, and expect them to get it right.

Until they don’t. Then we fragment into mini-mobs embracing an inconceivable variety of nutty theories about how the Fed should operate. Chewing.

In the disorderly postmortem under way, the trail leads quickly to the assertion that the Alan Greenspan Fed kept rates too low for too long (2002-04). One notch further back lies similar criticism about the stock-market bubble. Everyone sold on this pathology should reconsider.

First: The Fed is always behind. Always. It cannot know the future except to know that monetary policy and interest rates today will not have full effect for a year or more.

Worse, the economy is in a constant state of innovation, but the back-looking Fed must adjust gradually, not in catch-up lurches.

Second: For the Fed to raise rates and throw millions out of work, something must be wrong — something demonstrable to Congress and the people. In its whole history, that "something" has been serious inflation.

During the stock bubble there was no inflation, and pulling the plug on the whole economy then was indefensible; and from 2002-04 we were in near-deflation, losing a quarter of a million jobs each month.

The lesson from this disaster is the need for more Fed responsibility, not less. We should ask the Fed to use narrow blades, not just the interest-rate sledgehammer.

If the Fed were charged with "Big Cop" duty, the stock bubble could have been preempted by a needle into the sleepy Securities and Exchange Commission fanny: Demand proper underwriting of new issues.

Had the Fed slipped a shiv to foolish mortgage and other securitized-credit standards in 2003, when credit began its ruinous growth — which is within its current authority but not stated responsibility — we would not be here today.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.

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