Even Fed may not save our bacon this time: Jim Saft

By James Saft

VENDEMIAN, France (Reuters) - It will take considerably more than the Federal Reserve's cut in the discount rate, and its likely upcoming move to cut the Federal Funds rate, to pull the market's fat out of the fire.

While the Fed was right to cut its discount rate by a half a percent and take other steps to improve liquidity, the factors that scared bankers and money market managers into hiding under their desks haven't gone away.

It is clear from market action that nothing approaching calm has returned to credit markets.

Commercial paper markets have in parts frozen and a rush to safety drove some U.S. government bond yields down on Monday by the most since the crash of 1987.

The underlying bad loans in housing haven't gone away either. And with mortgage finance in a very severe credit crunch, the subprime problem will continue to spread, driving house prices lower and prompting still more defaults and consumer retrenchment.

It is hard to see how the U.S. economy can avoid a hard landing -- or even, whisper it, a recession -- even if the interest rate cuts the markets have already banked come through.

Because of that, and because of the opaque and complex way risk has been spread through the use of derivatives and structured finance, no one knows what or who constitutes a good risk, even for very short term loans.

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