--It’s an ambitious forecast. But in addition to facing rising...

--It’s an ambitious forecast. But in addition to facing rising oil prices, the Fed faces a recession. Americans are only now starting to see how much the housing bubble boosted employment (construction, mortgage brokers, real estate, DIY home hardware) and consumer spending (cash-out refinancing and home equity lines of credit). Without that stimulus to employment and consumer spending, the economy won’t just grow less fast. It will shrink some.

--And what about the politics of a rate cut? In the current political environment, the Fed will act to boost employment and housing at the expense of a stable currency. This could be very bad news for the dollar. But on the verge of an election year in the States, and under a growing drumbeat of stories about foreclosed homeowners and victims of predatory lending, the Fed has about one good chance to shift the public mood.

--And make no mistake, a double-barrelled rate cut is about reversing the bear market in trust and confidence that’s gripping both institutions and the global public. The continued bank run at Northern Rock in Britain has got to be on the Fed’s mind. It needs to stop the negative sentiment dead in its tracks – or risk being overrun by it.

--Though a similar panic hasn’t taken place in the States, the Fed understands that the source of the dollar’s remaining strength is one thing and one thing only: confidence. If that confidence is lost, so is the ability of the Fed to manage the situation (and that’s pretty sketchy as it is).

--Will a rate cut do anything to solve the underlying problems? Not that we can see. Wall Street is spoiled. It wants free money. The Fed enables America’s addition to cheap money. Withdrawal is painful. But it’s the only way to better economic health.

--You know the subprime collapse has hit the big-time when the guy who sells you coffee in the morning asks you about it. “Did you see that report on Four Corners last night about Cleveland?” we were asked this morning. “Yes. It was pretty sad.”

--And it is sad. Cleveland was one of America’s great industrial cities. It became a hub of the iron ore trade when the iron ore from the Mesabi iron range in Minnesota made its way from Lake Superior to Lake Erie and then to the Steel City, Pittsburgh, where the hard anthracite coal of Western Pennsylvania happened to be.

--Appalachian coal went from Cleveland back to cities like Chicago and Detroit and Minneapolis. Steel went too, building Chicago’s skyline, Detroit’s factories, and the millions of cars built by GM and Ford in the post-war boom.

--All of that trade still takes place, but on a vastly reduced scale. The jobs, the manufacturing, and much of the heavy industry have moved off-shore, where wages are cheaper and the cost of production is lower (and where environmental regulations are less stringent.) Globalisation brought cheap manufactured goods from China, but it cost high-paying manufacturing jobs in America’s Midwest. It was high price, in exchange for everyday low prices.

--And now comes the housing bust. A generation of blue-collar workers whose wages are falling now have subprime mortgages that will re-set at higher rates in the coming months—unless the Fed cuts rates dramatically or a bail out is organised. It is strange that the housing bubble should hit America’s Rust Belt as hard as it’s hitting the Sun Belt. But easy money is universally tempting.

--For the speculators in the housing boom, we don’t feel any pity. But there’s no denying a lot of Americans, through ignorance and not greed, are going to pay a very steep price for thinking they can get something for nothing. We hope the same doesn’t happen here in Australia. But there are many similarities. More on that tomorrow.