Ben Bernanke lacks a strategy to deal with the financial crisis. He just keeps dropping more and more money from his helicopter and hopes it will jump start the economic system. The futures market has already baked in a 50 basis point interest rate cut for this coming Wednesday so with the Dow having lost 312 points last Friday, it would probably collapse even further if Bernanke backed off the rate cut.

But what is the point of this cut? 30-year fixed mortgage rates are higher now (6.47%) than they were in August 2007 (6.45%) when the Fed began cutting the Fed Funds rate from 5.25% to what would end up being 1% if the Fed indeed cuts by 50 basis points on Wednesday. Paul Krugman argues that the high mortgage rates may be a result of U.S. policy not to put its "full faith and credit" behind Fannie and Freddie debt -- thereby increasing its risk. If the Fed was trying to loosen up credit, these numbers suggest its rate cuts are not doing the job.

And While there are some who anticipate it will cut only 25 basis points, I am not sure why the Fed thinks this rate cut will do anything more than use up precious ammunition that might be more useful in an even more severe financial emergency. At 1%, there is not much further to cut. And with the November election fast approaching, it is clear that a real strategy to analyze and fix the myriad financial problems Bush leaves his successor will not happen until January.

The New York Times reports that the Federal Reserve has less reserves. Specifically, a year ago it had $800 billion in reserves and that number is down 63% to $300 billion. The other $500 billion is "encumbered" -- that's a nice way of saying that instead of being invested in "safe" Treasury bills, the Fed owns the assets of American International Group (NYSE: AIG), $29 billion worth of grubby former Bear Stearns collateralized debt obligations (CDOs) and the like through a little something it calls "Maiden Lane LLC", and tens of billions worth of the same from Lehman Brothers Holdings Inc. (NYSE: LEH) and other banks.

I raised the question of Fed solvency in July. Whether it was solvent then, it is less so now. But is there a limit to how much money the Fed can create to fund itself? With demand for Treasury Bills skyrocketing (albeit at interest rock bottom interest rates of 0.14% for the 1-month bill), it looks like now would be a great time for the Fed to replenish its coffers by issuing a trillion dollars worth to shore up its balance sheet. If it can indeed do that, the downside is that these low rates will pay it very little income.

And assuming that the Fed does not want to be in the business of owning half a trillion worth of encumbered assets, it will eventually need to get rid of them. And in so doing, it could find itself in competition with the ever- dwindling portion of the investment banking and insurance industry which the government does not own. How so? Because the Fed will be competing to get the best price for the assets it is trying to sell.

Will it use its power to put those publicly traded companies in a pickle? Or will it forgo the advantage to the taxpayer so its competitors can profit? Beats me.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns AIG shares and has no financial interest in the other securities mentioned.

Yesterday Ben Bernanke acknowledged he was wrong when he said in May that the subprime meltdown was contained. That doesn't mean he would cut interest rates to ease the pain. Meanwhile, yesterday's Wall Street Journal [subscription required] wrote an excellent article on the origins and evolution of the current credit crunch.

I believe that the pain of the current credit contraction in mortgages is just beginning to be felt throughout the world. As I suggested during my CNBC interview with Maria Bartiromo on Monday, 47% of the $1.3 trillion subprime mortgages issued were liar loans -- that is, the borrowers did not document their income when they got the loan. But thanks to the way the mortgage industry is now structured, I think at least half of these loans should never have been made.

What's the problem? Thanks to a process called securitization -- which took off in the 1980s -- lenders can make more profit than ever when they extend credit to a borrower who wants to purchase a home. Instead of making a loan and keeping it on their books as they did in the past, lenders get a fee for closing the mortgage deal then they sell it to an investment bank that packages the mortgage with others and sells the package to institutional investors -- such as hedge funds, pension funds, and insurance companies.

Without much of a surprise, the Fed didn't change interest rates at today's meeting keeping the Fed Funds rate steady at 5.25%.

The Fed seemed to justify this decision by saying they expect "solid growth in employment and incomes" in coming quarters -- factors that would indicate economic health. The Fed also managed to acknowledge that the forming "credit crunch" has forced the housing market lower and increased the stock market's volatility. As such, if these conditions became worse the Fed could justify cutting rates.

There's a growing group of Wall Streeters advocating that Chairman Ben Bernanke begins cutting rates due to inflation risks and credit worries shortly. Lower rates allow people to borrow money at lower costs, allowing them to purchase new houses and keep demand steady in the housing market. But due to higher rates, these people argue, foreclosures are going to continue to increase as people can't support their mortgage payments -- a move that could propel the entire economy into a recession. In addition, higher interest rates stand to weaken the consumer as cheap credit is no longer available. In fact, Jim Cramer himself came on CNBC and yelled seemed to yell his anger out towards anyone who would listen.

Barring unusual circumstances, I highly doubt Bernanke will cut interest rates within the next few months. However, if a true recession begins to appear via an even weaker housing market, very troubled consumer, and employment/income issues, Bernanke will make the right move and cut the Fed Funds Rate.

Recent economic news seems to be pointing to the ultimate "soft landing" with the economy slowing to a low level of growth but not falling into a recession. Core inflation, although at the high end of the Federal Reserve's desired range, does not now seem to be pointing toward a rate increase in the near future.

Recent ISM data, including the ISM Non-Manufacturing report released this morning, indicate that the economy could be picking up from a short-term bottom. Fed Chairman Ben Bernanke seems to emphasize this economic strength in his remarks this morning.

What was the result of all this good news? The market was down. Only on Wall Street could good news be bad news. Why? These events seem to be latest information destroying Wall Street's hope for a rate cut by the Fed.

Remember that the Fed has been saying that a rate cut is not on the agenda for quite some time. It remains open to this option if the economy weakens substantially. However, the data shows very little indication that this is happening.

This is very similar to the mid to late 1990's in some ways. Several said then that it was just a matter of time before the economy collapsed into a recession. Those who exited the stock market in the mid 1990's had to wait several years for the recession and missed some pretty solid returns in the stock market.

Bernanke has given every indication that he will address severe economic weakness if and when it occurs. In the meantime, look at what the economic picture actually is, not what you believe it should be. It is a much more profitable venture!

Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.

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