First, of course, the Fed cut it’s Federal Funds Rate by 75 basis points, the biggest cut since 1984, and it did so a week before its regular meeting, which it hasn’t done since 911.

The US markets recovered after the rate cut, but still they were down by over 1% for the day.

I think that Paul Krugman’s analysis of this is accurate, Bernanke used to be the head of his department at Princeton, so I would assume that he knows him pretty well.

Basically, Bernanke is concerned about the Japanese slow down of the 1990s, when monetary tools simply stopped working:

What was so disturbing about Japan was the way monetary policy became ineffective; by the later 1990s the short-term interest rate was up against the ZLB — the “zero lower bound.” This is alternatively known as the “liquidity trap.” And once you’re there, conventional monetary policy can do no more, because interest rates can’t go below zero.

There was a lot of discussion of various unconventional monetary things you could do. But the best answer was not to get there in the first place. A 2004 paper co-authored by Bernanke argued that the ZLB could and should be avoided by “maintaining a sufficient inflation buffer and easing preemptively as necessary”.

In terms of corporate profits, Bank of America took a major hit, with profits dropping 95% as a result of $5 billion dollar writedown, and its, “tier 1 capital ratio – a key measure of its ability to absorb losses – stood at 6.87 percent at the end of the year, down from 8.22 percent in the previous quarter, due to its purchase of LaSalle Bank and lower net income during the second half of last year.”

Wachovia took an 89% hit on profits, “due to a $1.7 billion reduction in the value of certain portfolios and $1.5 billion set aside to cover bad loans”.

More real estate and derivatives.

And while we are on the topic of real estate and derivatives, bond insurer Ambac is looking for a buyer. If they take monopoly money, I’m game, but only if it’s less than one whole game.

Otherwise, the deal just does not make financial sense.

Of course, the one thing that we can be sure of is that if George W. Bush speaks, the market will tank, so, of course, they are talking again, and saying that they are looking at increasing the stimulus package beyond the $150 billion originally proposed.

My guess is that there is a “Bush Ranger” out there who wants a special tax break just for him.

Of course, we are already beginning to see the allocation of blame, aka “blamestorming”, with EU Economic and Monetary Affairs Commissioner Joaquin Almunia saying that this problem is a result of excessive US trade deficit…..Ummmm…Well Duh!!!!…Though that whole deregulation of markets thing isn’t working either.

And on the housing front, California loan defaults reach have reached a 15-year high in Q4 2007, up 114% from the same time in 2006. Foreclosures are up 421.2% from 2006.