For the first time since 2002, the Fed said that inflation is uncomfortably below target (any time below 1 percent, some sectors of the economy are already in deflation), and the Fed "… is prepared to provide additional accommodation if needed."

Credit markets took the Fed’s post-meeting announcement on Tuesday and ran a bit too far: the 10-year Treasury note stone-dropped to 2.5 percent, today back to 2.6 percent, but mortgages were little changed.

Given the deep policy division at the Fed (the do-nothings paralyzing the do-somethings), I think the Fed will need to see weaker data to resume quantitative easing.

Martin Feldstein this week had the best description of the economy: "In a holding pattern."

He sits on the National Bureau of Economic Research committee that calls the beginning and end of recessions, and looked less than thrilled at its pronouncement that the Great Recession ended 15 months ago. Next Fed meeting: the day after Election Day.

One of the puzzles in this cycle has been the steady contraction in lending by banks. The Fed has packed banks with no-cost reserves since 2008, but nothing has come out the far side, with bank credit shrinking to a point not seen since the 1930s.

Why? The bankers say that few people or businesses qualify for loans; and those that do … do not want to borrow. The bankers would also like you to stop asking.

As pinched and punishing as bankers can be, banks make money only by making loans. However, fear of loss stops ’em cold. There are two broad categories of loss fear: 1) worry about new loans that you could make, and 2) the rather deeper concern for loans that you have already made.

But, we know the banks are now in fine shape, don’t we? Sharp Treasury Secretary Timothy Geithner and his super-duper stress test last year said so, right?

I get the sense that banks are trapped in a game of "hot potato." The spuds in question: mortgages long gone from bank balance sheets, long-since sold, or partially written off, or those in which somebody else took the first hit.

Now these "rotten russets" are returning to the fields of original harvest. Call it "Night of The Living-Dead Tubers."

Fannie and Freddie have outstanding at least $20 billion in bank buyback demands, the bank foot-dragging causing complaints to Congress. Analysis of defaulted loans often trails foreclosure by years, hence there is no way to know how many zombie Idahos will lurch home.

Right now, Fannie and Freddie have another 1.5 million loans headed into foreclosure, many to be dumped in the buyback truck, and a steady flow behind that.

Fannie-Freddie buybacks are straightforward. The hot-spud game is a circular affair. At the peak of stupidity in 2007, there were $2.2 trillion in mortgage asset-backed securities (ABS) outstanding (it was the worst paper, nothing to do with Fannie-Freddie), now written down by $789 billion (see the Fed’s Z-1 statement).

Many of those loans were made by the dearly departed and gone altogether (aka Bear Stearns, Lehman Brothers); however, many more were made by the departed-but-absorbed (World Savings by Wachovia, then Wells Fargo; Countrywide and Merrill Lynch by Bank of America; Washington Mutual by Chase), and even more by the usual-suspect survivors.

Seems that many of the buyers of ABS from these creators feel they were misled, and would like buyback at original face value. Seems further that the creators hung on to the lucrative right to service these delayed-action explosive spuds, and the captive servicers are reluctant to tell their parent banks that they have to buy back, even though that’s the servicers’ duty.

And there’s the Federal Home Loan Bank system, in court to force the original cooks of blighted hash browns to fry in their own oil.

Then, behind all of that lies the officially sanctioned commercial-loan extend and pretend, $1.4 trillion outstanding at banks, and another half-trillion ABS-securitized, with real losses hidden.

And the second mortgages and equity lines outstanding, still at 90 percent of the $1.1 trillion 2007 peak — banks haven’t made a lot of new seconds, and the old ones — half of Ireland moved to Boston to keep from eating stuff like that.

As frustrated as the nation was by TARP (the federal Troubled Asset Relief Program) and "bailouts," banks need help. Not more pretense of good health, not more punishment, not more "yer-on-yer-own," but help.

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